-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QrU9/UfF39zhEv/pPhe24GxLelBkyrT7vty7TmVjkqmLMzjobfPllAWKAOdEm8Cl 31gFzekhO7lW+Q+JBWAOMA== 0000932471-04-001469.txt : 20041220 0000932471-04-001469.hdr.sgml : 20041220 20041220164114 ACCESSION NUMBER: 0000932471-04-001469 CONFORMED SUBMISSION TYPE: 485APOS PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 20041220 DATE AS OF CHANGE: 20041220 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VANGUARD WINDSOR FUNDS/ CENTRAL INDEX KEY: 0000107606 IRS NUMBER: 510082711 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 485APOS SEC ACT: 1933 Act SEC FILE NUMBER: 002-14336 FILM NUMBER: 041214534 BUSINESS ADDRESS: STREET 1: PO BOX 2600 STREET 2: V37 CITY: VALLEY FORGE STATE: PA ZIP: 19482 BUSINESS PHONE: 6106696289 MAIL ADDRESS: STREET 1: PO BOX 2600 STREET 2: V37 CITY: VALLEY FORGE STATE: PA ZIP: 19482 FORMER COMPANY: FORMER CONFORMED NAME: VANGUARD/WINDSOR FUNDS INC DATE OF NAME CHANGE: 19931203 FORMER COMPANY: FORMER CONFORMED NAME: WINDSOR FUNDS INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: WINDSOR FUNDS DATE OF NAME CHANGE: 19851031 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VANGUARD WINDSOR FUNDS/ CENTRAL INDEX KEY: 0000107606 IRS NUMBER: 510082711 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 485APOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-00834 FILM NUMBER: 041214535 BUSINESS ADDRESS: STREET 1: PO BOX 2600 STREET 2: V37 CITY: VALLEY FORGE STATE: PA ZIP: 19482 BUSINESS PHONE: 6106696289 MAIL ADDRESS: STREET 1: PO BOX 2600 STREET 2: V37 CITY: VALLEY FORGE STATE: PA ZIP: 19482 FORMER COMPANY: FORMER CONFORMED NAME: VANGUARD/WINDSOR FUNDS INC DATE OF NAME CHANGE: 19931203 FORMER COMPANY: FORMER CONFORMED NAME: WINDSOR FUNDS INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: WINDSOR FUNDS DATE OF NAME CHANGE: 19851031 485APOS 1 windsora.txt VANGUARD WINDSOR FUNDS A FILING - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM N-1A REGISTRATION STATEMENT (NO. 2-14336) UNDER THE SECURITIES ACT OF 1933 PRE-EFFECTIVE AMENDMENT NO. POST-EFFECTIVE AMENDMENT NO. 102 AND REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 AMENDMENT NO. 105 VANGUARD WINDSOR FUNDS (EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST) P.O. BOX 2600, VALLEY FORGE, PA 19482 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) REGISTRANT'S TELEPHONE NUMBER (610) 669-1000 R. GREGORY BARTON, ESQUIRE P.O. BOX 876 VALLEY FORGE, PA 19482 IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE ON FEBRUARY 18, 2005, PURSUANT TO PARAGRAPH (A) OF RULE 485. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- VANGUARD(R) WINDSOR(TM) FUND Investor Shares & Admiral(TM) Shares . February 18, 2005 This prospectus contains financial data for the Fund through the fiscal year ended October 31, 2004. STOCK NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE VANGUARD GROUP (R) VANGUARD WINDSOR FUND Investor Shares and Admiral Shares Prospectus February 18, 2005 A Value Stock Mutual Fund - -------------------------------------------------------------------------------- CONTENTS - -------------------------------------------------------------------------------- 1 FUND PROFILE 4 ADDITIONAL INFORMATION 4 MORE ON THE FUND 9 THE FUND AND VANGUARD 9 INVESTMENT ADVISORS 10 DIVIDENDS, CAPITAL GAINS, AND TAXES 12 SHARE PRICE 13 FINANCIAL HIGHLIGHTS 16 INVESTING WITH VANGUARD 16 Buying Shares 19 Converting Shares 20 Redeeming Shares 22 Exchanging Shares 23 Other Rules You Should Know 26 Fund and Account Updates 27 Contacting Vanguard GLOSSARY OF INVESTMENT TERMS ================================================================================ ================================================================================ WHY READING THIS PROSPECTUS IS IMPORTANT This prospectus explains the investment objective, policies, strategies, and risks associated with the Fund. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk(R) explanations along the way. Reading the prospectus will help you decide whether the Fund is the right investment for you. We suggest that you keep this prospectus for future reference. - -------------------------------------------------------------------------------- ================================================================================ SHARE CLASS OVERVIEW The Fund offers two separate classes of shares: Investor Shares and Admiral Shares. Please note that Admiral Shares are NOT available to: - - SIMPLE IRAs and 403(b)(7) custodial accounts; - - Other retirement plan accounts receiving special administrative services from Vanguard; or - - Accounts maintained by financial intermediaries, except in limited circumstances. The Fund's separate share classes have different expenses; as a result, their investment performances will differ. - -------------------------------------------------------------------------------- 1 FUND PROFILE INVESTMENT OBJECTIVE The Fund seeks to provide long-term capital appreciation and income. PRIMARY INVESTMENT STRATEGIES The Fund invests mainly in mid- and large-capitalization companies whose stocks are considered by the Fund's advisors to be undervalued. Undervalued stocks are generally those that are out of favor with investors and, in the opinion of the advisors, are trading at prices that are below-average in relation to such measures as earnings and book value. These stocks often have above-average dividend yields. The Fund uses multiple investment advisors. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. The Fund's performance could be hurt by: - - Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. - - Investment style risk, which is the chance that returns from mid- and large-capitalization value stocks will trail returns from the overall stock market. Historically, mid-cap stocks have been more volatile in price than the large-cap stocks that dominate the overall market, and they often perform quite differently. - - Manager risk, which is the chance that poor security selection will cause the Fund to underperform relevant benchmarks or other funds with a similar investment objective. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund's Investor Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the share classes presented compare with those of a relevant market index. Keep in mind that the Fund's past returns (before and after taxes) do not indicate how it will perform in the future. ---------------------------------------------------- ANNUAL TOTAL RETURNS--INVESTOR SHARES (BAR CHART HERE) ---------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was x.xx% (quarter ended month dd, yyyy), and the lowest return for a quarter was -x.xx% (quarter ended month dd, yyyy). 2 AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2004 - ------------------------------------------------------------------------------- 1 YEAR 5 YEARS 10 YEARS - -------------------------------------------------------------------------------- VANGUARD WINDSOR FUND INVESTOR SHARES Return Before Taxes xx.xx% xx.xx% xx.xx% Return After Taxes on Distributions xx.xx xx.xx xx.xx Return After Taxes on Distributions and Sale of Fund Shares xx.xx xx.xx xx.xx - -------------------------------------------------------------------------------- VANGUARD WINDSOR FUND ADMIRAL SHARES* Return Before Taxes xx.xx% xx.xx% xx.xx% - ------------------------------------------------------------------------------- RUSSELL 1000 VALUE INDEX (reflects no deduction for fees, expenses, or taxes) xx.xx% xx.xx% xx.xx% - ------------------------------------------------------------------------------- NOTE ON AFTER-TAX RETURNS. Actual after-tax returns depend on your tax situation and may differ from those shown in the preceding table. When calculating after-tax return figures for a fund, we assume the shareholder was in the highest federal marginal income tax bracket at the time of each distribution of income or capital gains, but we do not consider state or local income taxes. Please note that actual after-tax returns will vary for a fund's separate share classes and are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares will be higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder. FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Investor Shares or Admiral Shares of the Fund. Transaction costs incurred by the Fund for buying and selling securities are not reflected in the table. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended October 31, 2004. INVESTOR ADMIRAL SHARES SHARES SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None None Purchase Fee: None None Sales Charge (Load) Imposed on Reinvested Dividends: None None Redemption Fee None None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.xx% 0.xx% 12b-1 Distribution Fee: None None Other Expenses: 0.xx% 0.xx% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.XX% 0.XX% 3 The following examples are intended to help you compare the cost of investing in the Fund's Investor Shares or Admiral Shares with the cost of investing in other mutual funds. They illustrate the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. These examples assume that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. 1 YEAR 3 YEARS 5 YEARS 10 YEARS - --------------------------------------------------------- Investor Shares $xx $xxx $xxx $xxx Admiral Shares xx xxx xxx xxx - --------------------------------------------------------- THESE EXAMPLES SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. ================================================================================ PLAIN TALK ABOUT FUND EXPENSES All mutual funds have operating expenses. These expenses, which are deducted from a fund's gross income, are expressed as a percentage of the net assets of the fund. Vanguard Windsor Fund's expense ratios in fiscal year 2004 were as follows: for Investor Shares, 0.xx%, or $x.x0 per $1,000 of average net assets; for Admiral Shares, 0.xx%, or $x.x0 per $1,000 of average net assets. The average multi-cap value mutual fund had expenses in 2003 of x.xx%, or $xx.x0 per $1,000 of average net assets (derived from data provided by Lipper Inc., which reports on the mutual fund industry). Management expenses, which are one part of operating expenses, include investment advisory fees as well as other costs of managing a fund--such as account maintenance, reporting, accounting, legal, and other administrative expenses. ================================================================================ ================================================================================ PLAIN TALK ABOUT COSTS OF INVESTING Costs are an important consideration in choosing a mutual fund. That's because you, as a shareholder, pay the costs of operating a fund, plus any transaction costs incurred when the fund buys or sells securities. These costs can erode a substantial portion of the gross income or the capital appreciation a fund achieves. Even seemingly small differences in expenses can, over time, have a dramatic effect on a fund's performance. ================================================================================ 4 ================================================================================ ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS CONVERSION FEATURES Dividends are distributed Investor Shares--May be converted to semiannually in June and December; Admiral Shares if you meet certain account capital gains, if any, are balance and tenure requirements. distributed annually in December. Admiral Shares--May be converted to Investor Shares if you are no longer INVESTMENT ADVISORS eligible for Admiral Shares. - - Wellington Management Company, LLP, Boston, Mass., since NEWSPAPER ABBREVIATION inception Investor Shares--Wndsr - - Sanford C. Bernstein & Co., LLC, Admiral Shares--WndsrAdml New York City, N.Y., since 1999 VANGUARD FUND NUMBER INCEPTION DATE Investor Shares--22 Investor Shares--October 23, 1958 Admiral Shares--5022 Admiral Shares--November 12, 2001 CUSIP NUMBER NET ASSETS (ALL SHARE CLASSES) AS Investor Shares--922018106 OF OCTOBER 31, 2004 Admiral Shares--922018403 $xx billion TICKER SYMBOL Investor Shares--VWNDX SUITABLE FOR IRAS Admiral Shares--VWNEX Yes MINIMUM INITIAL INVESTMENT Investor Shares--$3,000; $1,000 for IRAs (excluding SEP-IRAs) and most custodial accounts for minors Admiral Shares--$250,000 ================================================================================ MORE ON THE FUND This prospectus describes the primary risks you would face as a Fund shareholder. It is important to keep in mind one of the main axioms of investing: The higher the risk of losing money, the higher the potential reward. The reverse, also, is generally true: The lower the risk, the lower the potential reward. As you consider an investment in any mutual fund, you should take into account your personal tolerance for daily fluctuations in the securities markets. Look for this FLAG symbol throughout the prospectus. It is used to mark detailed information about the more significant risks that you would confront as a Fund shareholder. The following sections explain the primary investment strategies and policies that the Fund uses in pursuit of its objective. The Fund's board of trustees, which oversees the Fund's management, may change investment strategies or policies in the interest of shareholders without a shareholder vote, unless those strategies or policies are designated as fundamental. MARKET EXPOSURE The Fund invests mainly in mid- and large-capitalization companies (although the advisors will occasionally select stocks with lower market values) whose stocks are considered by the Fund's advisors to be undervalued. Undervalued stocks are generally those that are out of favor with investors and, in the opinion of the advisors, are trading at prices that are below-average in relation to such measures as earnings and book value. These stocks often have above-average dividend yields. 5 Stocks of publicly traded companies and funds that invest in stocks are often classified according to market value, or market capitalization. These classifications typically include small-cap, mid-cap, and large-cap. It's important to understand that, for both companies and stock funds, market capitalization ranges change over time. Also, interpretations of size vary, and there are no "official" definitions of small-, mid-, and large-cap, even among Vanguard fund advisors. The asset-weighted median market capitalization of the Fund as of October 31, 2004, was $xx.x billion. FLAG THE FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK PRICES OVERALL WILL DECLINE. STOCK MARKETS TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF FALLING PRICES. To illustrate the volatility of stock prices, the following table shows the best, worst, and average annual total returns for the U.S. stock market over various periods as measured by the Standard & Poor's 500 Index, a widely used barometer of market activity. (Total returns consist of dividend income plus change in market price.) Note that the returns shown do not include the costs of buying and selling stocks or other expenses that a real-world investment portfolio would incur. U.S. STOCK MARKET RETURNS (1926-2004) - ---------------------------------------------------------- 1 YEAR 5 YEARS 10 YEARS 20 YEARS - ---------------------------------------------------------- Best 54.2% 28.6% 19.9% 17.8% Worst -43.1 -12.4 -0.8 3.1 Average 12.4 10.7 11.2 11.3 - ---------------------------------------------------------- The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through 2004. You can see, for example, that while the average return on common stocks for all of the 5-year periods was 10.7%, average returns for individual 5-year periods ranged from -12.4% (from 1928 through 1932) to 28.6% (from 1995 through 1999). These average returns reflect past performance on common stocks; you should not regard them as an indication of future returns from either the stock market as a whole or the Fund in particular. ================================================================================ PLAIN TALK ABOUT GROWTH FUNDS AND VALUE FUNDS Growth investing and value investing are two styles employed by stock-fund managers. Growth funds generally focus on stocks of companies believed to have above-average potential for growth in revenue and earnings. These stocks typically have low dividend yields and above-average prices in relation to such measures as earnings and book value. Value funds typically emphasize stocks whose prices are below average in relation to those measures; these stocks often have above-average dividend yields. Growth and value stocks have historically produced similar long-term returns, though each category has periods when it outperforms the other. - -------------------------------------------------------------------------------- 6 FLAG THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE THAT RETURNS FROM MID- AND LARGE-CAPITALIZATION VALUE STOCKS WILL TRAIL RETURNS FROM THE OVERALL STOCK MARKET. HISTORICALLY, MID-CAP STOCKS HAVE BEEN MORE VOLATILE IN PRICE THAN THE LARGE-CAP STOCKS THAT DOMINATE THE OVERALL MARKET, AND THEY OFTEN PERFORM QUITE DIFFERENTLY. SECURITY SELECTION The Fund uses two investment advisors, each of which is responsible for managing a portion of the Fund's assets. Each advisor independently chooses and maintains a portfolio of common stock for the Fund. These advisors employ active investment management methods, which means that securities are bought and sold according to the advisors' evaluations of companies and their financial prospects and about the stock market and economy in general. Each advisor will sell a security when it is no longer as attractive as an alternative investment. While each advisor uses a different process to select securities, each is committed to investing in mid- and large-cap stocks that, in its opinion, are undervalued. Undervalued stocks are generally those that are out of favor with investors and, in the opinion of the advisors, are trading at prices that are below-average in relation to such measures as earnings and book value. These stocks often have above-average dividend yields. Wellington Management Company, LLP (Wellington Management), managed about xx% of the Fund's assets as of October 31, 2004. Wellington Management invests in stocks, relying on the depth and experience of its investment team and supporting global industry analysts to identify stocks that are meaningfully undervalued by the market. The portfolio, in aggregate, typically offers prospective growth of earnings plus a dividend yield comparable with the broad market averages, while at the same time being undervalued relative to the market. Sanford C. Bernstein & Co., LLC (Bernstein) managed about xx% of the Fund's assets as of October 31, 2004. Using a fundamental approach, Bernstein seeks to identify companies that are undervalued relative to their long-term earnings potential or asset values. The firm's primary valuation tool is a proprietary dividend discount model. The team applies strict quantitative controls to produce a portfolio with specific risk and return expectations compared with the Russell 1000 Value Index. The Vanguard Group (Vanguard) managed about xx% of the Fund's assets as of October 31, 2004. Vanguard typically invests its portion of the Fund's assets in stock futures and/or shares of exchange-traded funds. For more details, see "Other Investment Policies and Risks." FLAG THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT POOR SECURITY SELECTION WILL CAUSE THE FUND TO UNDERPERFORM RELEVANT BENCHMARKS OR OTHER FUNDS WITH A SIMILAR INVESTMENT OBJECTIVE. The Fund is generally managed without regard to tax ramifications. 7 OTHER INVESTMENT POLICIES AND RISKS Besides investing in undervalued common stocks, the Fund may make other kinds of investments to achieve its objective. Although the Fund typically does not make significant investments in foreign securities, it reserves the right to invest up to 20% of its assets this way. Foreign securities may be traded on U.S. or foreign markets. To the extent that it owns foreign securities, the Fund is subject to (1) country risk, which is the chance that domestic events--such as political upheaval, financial troubles, or natural disasters--will weaken a country's securities markets; and (2) currency risk, which is the chance that the value of a foreign investment, measured in U.S. dollars, will decrease because of unfavorable changes in currency exchange rates. The Fund may invest in money market instruments, fixed income securities, convertible securities, and other equity securities, such as preferred stocks. The Fund may invest up to 15% of its net assets in restricted securities with limited marketability or in other illiquid securities. The Fund may invest, to a limited extent, in derivatives. Generally speaking, a derivative is a financial contract whose value is based on the value of a traditional security (such as a stock or bond), an asset (such as a commodity like gold), or a market index (such as the S&P 500 Index). The Fund will not use derivatives for speculation or for the purpose of leveraging (magnifying) investment returns. Vanguard typically invests a small portion of the Fund's assets in stock index futures and/or shares of exchange-traded funds, including VIPER(R) Shares issued by Vanguard stock index funds. Stock index futures and ETFs provide returns similar to those of common stocks. The advisor may purchase them when doing so will reduce the Fund's transaction costs or add value because the instruments are favorably prices. Vanguard receives no additional revenue from investing Fund assets in VIPER Shares of other Vanguard funds. Fund assets invested in VIPER Shares are excluded when allocating to the Fund its share of the costs of Vanguard operations. CASH MANAGEMENT Vanguard may invest the Fund's daily cash balance in one or more Vanguard(R) CMT Funds, which are very low-cost money market funds. The Fund is permitted to invest in the CMT Funds under the terms of an exemption granted by the Securities and Exchange Commission (SEC). The Fund bears its proportionate share of the "at-cost" expenses of the Vanguard CMT Fund in which it invests. TEMPORARY INVESTMENT MEASURES The Fund may temporarily depart from its normal investment policies--for instance, by allocating substantial assets to cash investments--in response to extraordinary market, economic, political, or other conditions. In doing so, the Fund may succeed in avoiding losses, but may otherwise fail to achieve its investment objective. 8 FREQUENT TRADING OR MARKET-TIMING Some investors try to profit from strategies involving frequent trading of mutual fund shares, such as market-timing. As money is shifted in and out by a shareholder engaging in frequent trading, a fund incurs expenses for buying and selling securities, resulting in increased brokerage and administrative costs. These costs are borne by all fund shareholders, including the long-term investors who do not generate the costs. Frequent trading may also interfere with an advisor's ability to efficiently manage the fund. The Vanguard(R) funds do not accommodate frequent trading. The board of trustees of each Vanguard fund has adopted policies and procedures reasonably designed to detect and discourage frequent trading and, in some cases, to compensate the fund for the costs associated with it. Although there is no assurance that Vanguard will be able to detect or prevent frequent trading or market-timing in all circumstances, the following policies have been adopted to address these issues: - - Each Vanguard fund reserves the right to reject any purchase request--including exchanges from other Vanguard funds--without notice and regardless of size. A purchase request could be rejected if Vanguard determines that such purchase may disrupt a fund's operation or performance or because of a history of frequent trading by the investor. - - Each Vanguard fund (other than money market funds and VIPER(R) Shares) limits the number of times that an investor can exchange into and out of the fund. - - Certain Vanguard funds charge shareholders purchase and/or redemption fees on transactions. See the INVESTING WITH VANGUARD section of this prospectus for further details on Vanguard's transaction policies. Each fund (other than money market funds), in determining its net asset value, may use fair-value pricing as described in the SHARE PRICE section. When used, fair-value pricing may reduce or eliminate the profitability of certain frequent-trading strategies. DO NOT INVEST WITH VANGUARD IF YOU ARE A MARKET-TIMER. TURNOVER RATE Although the Fund normally seeks to invest for the long term, it may sell securities regardless of how long they have been held. The FINANCIAL HIGHLIGHTS section of this prospectus shows historical turnover rates for the Fund. A turnover rate of 100%, for example, would mean that the Fund had sold and replaced securities valued at 100% of its net assets within a one-year period. The average turnover rate for mid-cap value funds was approximately 103%, as reported by Morningstar, Inc., on October 31, 2004. ================================================================================ PLAIN TALK ABOUT TURNOVER RATE Before investing in a mutual fund, you should review its turnover rate. This gives an indication of how transaction costs, which are not included in the fund's expense ratio, could affect the fund's future returns. In general, the greater the volume of buying and selling by the fund, the greater the impact that brokerage commissions and other transaction costs will have on its return. Also, funds with high turnover rates may be more likely to generate capital gains that must be distributed to shareholders as taxable income. ================================================================================ 9 THE FUND AND VANGUARD The Fund is a member of The Vanguard Group, a family of 36 investment companies with more than 130 funds holding assets in excess of $750 billion. All of the funds that are members of The Vanguard Group share in the expenses associated with administrative services and business operations, such as personnel, office space, equipment, and advertising. Vanguard also provides marketing services to the funds. Although shareholders do not pay sales commissions or 12b-1 distribution fees, each fund (or in the case of a fund with multiple share classes, each share class of the fund) pays its allocated share of The Vanguard Group's marketing costs. ================================================================================ PLAIN TALK ABOUT VANGUARD'S UNIQUE CORPORATE STRUCTURE The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by the funds it oversees and thus indirectly by the shareholders in those funds. Most other mutual funds are operated by for-profit management companies that may be owned by one person, by a group of individuals, or by investors who own the management company's stock. The management fees charged by these companies include a profit component over and above the companies' cost of providing services. By contrast, Vanguard provides services to its member funds on an "at-cost" basis, with no profit component, which helps to keep the funds' expenses low. ================================================================================ INVESTMENT ADVISORS The Fund uses a multimanager approach to investing its assets. Each advisor named below independently manages its assigned portion of the Fund's assets, subject to the supervision and oversight of Vanguard and the board of trustees. - - Wellington Management Company, LLP, 75 State Street, Boston, MA 02109, is an investment advisory firm founded in 1928. As of October 31, 2004, Wellington Management managed about $xxx billion in assets. - - Sanford C. Bernstein & Co., LLC, 767 Fifth Avenue, New York, NY 10153, is a registered investment advisor and a unit of Alliance Capital Management. As of October 31, 2004, Alliance Capital managed about $xxx billion in assets. The Fund pays Wellington Management and Bernstein on a quarterly basis. For each advisor, the quarterly fee is based on certain annual percentage rates applied to average month-end net assets managed by the advisor over the period. In addition, the quarterly fees paid to each advisor are increased or decreased based on the advisor's performance in comparison with that of a benchmark index. For these purposes, the cumulative total return of each advisor's portion of the Fund over a trailing 36-month period is compared with that of the S&P 500 Index (for Wellington Management) and the Russell 1000 Value Index (for Bernstein) over the same period. Vanguard provides advisory services to the Fund on an at-cost basis. Please consult the Fund's Statement of Additional Information for more information about the Fund's investment advisory arrangements. For the fiscal year ended October 31, 2004, the advisory fees and expenses represented an effective annual rate of 0.xx% of the Fund's average net assets before a performance- based increase of 0.0x%. Each advisor, when trading securities on behalf of the Fund, must seek total costs or total proceeds that are the most favorable under the circumstances applicable to each transaction 10 (best execution). Each advisor selects broker-dealers based on its assessment of their ability to provide best execution. At the direction of the Fund's board of trustees, some portion of Fund transactions may be directed to a broker that has previously agreed to rebate a portion of the commissions it receives directly to the Fund, so long as the advisor reasonably believes that the broker can provide best execution. Under the terms of an SEC exemption, the Fund's board of trustees may, without prior approval from shareholders, change the terms of an advisory agreement or hire a new investment advisor--either as a replacement for an existing advisor or as an additional advisor. Any significant change in the Fund's advisory arrangements will be communicated to shareholders in writing. As the Fund's sponsor and overall manager, The Vanguard Group may provide additional investment advisory services to the Fund, on an at-cost basis, at any time. Vanguard may also recommend to the board of trustees that an advisor be hired, terminated, or replaced, or that the terms of an existing advisory agreement be revised. ================================================================================ PLAIN TALK ABOUT THE FUND'S ADVISORS The managers primarily responsible for overseeing the Fund's investments are: DAVID R. FASSNACHT, Senior Vice President and Partner of Wellington Management. He has worked in investment management since 1988; has been with Wellington Management since 1991; and has been Assistant Fund Manager since 2001. Education: B.S., The Wharton School of the University of Pennsylvania. MARILYN G. FEDAK, CFA, Chief Investment Officer and Chairman of the Bernstein U.S. Equity Investment Policy Group. She has worked in investment management since 1972; has managed investment portfolios for Bernstein and its predecessor since 1984; and has managed the Fund since 1999. Education: B.A., Smith College; M.B.A., Harvard Business School. JOHN D. PHILLIPS, JR., CFA, Senior Portfolio Manager at Bernstein. He has worked in investment management since 1972; has been with Bernstein and its predecessor since 1994; and has managed the Fund since 2003. Education: B.A., Hamilton College; M.B.A., Harvard Business School. ================================================================================ DIVIDENDS, CAPITAL GAINS, AND TAXES FUND DISTRIBUTIONS The Fund distributes to shareholders virtually all of its net income (interest and dividends, less expenses) as well as any net capital gains realized from the sale of its holdings. Income dividends generally are distributed in June and December; capital gains distributions generally occur in December. You can receive distributions of income or capital gains in cash, or you can have them automatically reinvested in more shares of the Fund. 11 ================================================================================ PLAIN TALK ABOUT DISTRIBUTIONS As a shareholder, you are entitled to your portion of a fund's income from interest and dividends as well as gains from the sale of investments. Income consists of both the dividends that the fund earns from any stock holdings and the interest it receives from any money market and bond investments. Capital gains are realized whenever the fund sells securities for higher prices than it paid for them. These capital gains are either short-term or long-term, depending on whether the fund held the securities for one year or less or for more than one year. You receive the fund's earnings as either a dividend or capital gains distribution. ================================================================================ BASIC TAX POINTS Vanguard will send you a statement each year showing the tax status of all your distributions. In addition, investors in taxable accounts should be aware of the following basic tax points: - - Distributions are taxable to you for federal income tax purposes, whether or not you reinvest these amounts in additional Fund shares. - - Distributions declared in December--if paid to you by the end of January--are taxable for federal income tax purposes as if received in December. - - Any dividend and short-term capital gains distributions that you receive are taxable to you as ordinary income for federal income tax purposes. If you are an individual and meet certain holding-period requirements with respect to your Fund shares, you may be eligible for reduced federal tax rates on "qualified dividend income," if any, distributed by the Fund. - - Any distributions of net long-term capital gains are taxable to you as long-term capital gains for federal income tax purposes, no matter how long you've owned shares in the Fund. - - Capital gains distributions may vary considerably from year to year as a result of the Fund's normal investment activities and cash flows. - - A sale or exchange of Fund shares is a taxable event. This means that you may have a capital gain to report as income, or a capital loss to report as a deduction, when you complete your federal income tax return. - - Dividend and capital gains distributions that you receive, as well as your gains or losses from any sale or exchange of Fund shares, may be subject to state and local income taxes. - - Any conversion between classes of shares of the same fund is a nontaxable event. By contrast, an exchange between classes of shares of different funds is a taxable event. 12 ================================================================================ PLAIN TALK ABOUT "BUYING A DIVIDEND" Unless you are investing through a tax-deferred retirement account (such as an IRA), you should consider avoiding a purchase of fund shares shortly before the fund makes a distribution, because doing so can cost you money in taxes. This is known as "buying a dividend." For example: On December 15, you invest $5,000, buying 250 shares for $20 each. If the fund pays a distribution of $1 per share on December 16, its share price will drop to $19 (not counting market change). You still have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250 shares x $1 = $250 in distributions), but you owe tax on the $250 distribution you received--even if you reinvest it in more shares. To avoid "buying a dividend," check a fund's distribution schedule before you invest. ================================================================================ GENERAL INFORMATION BACKUP WITHHOLDING. By law, Vanguard must withhold 28% of any taxable distributions or redemptions from your account if you do not: - - Provide us with your correct taxpayer identification number; - - Certify that the taxpayer identification number is correct; and - - Confirm that you are not subject to backup withholding. Similarly, Vanguard must withhold taxes from your account if the IRS instructs us to do so. FOREIGN INVESTORS. Vanguard funds generally are not sold outside the United States, except to certain qualified investors. If you reside outside the United States, please consult our website at www.vanguard.com and review "Non-U.S. Investors." Foreign investors should be aware that U.S. withholding and estate taxes may apply to any investments in Vanguard funds. INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to your address of record is returned as undeliverable, Vanguard will automatically reinvest all future distributions until you provide us with a valid mailing address. TAX CONSEQUENCES. This prospectus provides general tax information only. If you are investing through a tax-deferred retirement account, such as an IRA, special tax rules apply. Please consult your tax advisor for detailed information about a fund's tax consequences for you. SHARE PRICE The Fund's share price, called its net asset value, or NAV, is calculated each business day as of the close of regular trading on the New York Stock Exchange, generally 4 p.m., Eastern time. NAV per share is computed by dividing the net assets allocated to each share class by the number of Fund shares outstanding for that class. On holidays or other days when the Exchange is closed, the NAV is not calculated, and the Fund does not transact purchase or redemption requests. However, on those days the value of the Fund's assets may be affected to the extent that the Fund holds foreign securities that trade on foreign markets that are open. 13 Stocks held by a Vanguard fund are valued at their market value when reliable market quotations are readily available. Certain short-term debt instruments used to manage a fund's cash are valued on the basis of amortized cost. The values of any foreign securities held by a fund are converted into U.S. dollars using an exchange rate obtained from an independent third party. When reliable market quotations are not readily available, securities are priced at their fair value, which is the price a security's owner might reasonably expect to receive upon its sale. A fund also may use fair-value pricing if the value of a security it holds has been materially affected by events occurring before the fund's pricing time but after the close of the primary markets or exchanges on which the security is traded. This most commonly occurs with foreign securities, which may trade on foreign exchanges that close many hours before the fund's pricing time. Intervening events might be company-specific (e.g., earnings report, merger announcement); country-specific (e.g., natural disaster, economic or political news, act of terrorism, interest rate change); or global. Intervening events include price movements in U.S. markets that are deemed to affect the value of foreign securities. Although rare, fair-value pricing also may be used for domestic securities--for example, if (1) trading in a security is halted and does not resume before the fund's pricing time or if a security does not trade in the course of a day, and (2) the fund holds enough of the security that its price could affect the fund's NAV. Fair-value prices are determined by Vanguard according to procedures adopted by the board of trustees. When fair-value pricing is employed, the prices of securities used by a fund to calculate its NAV may differ from quoted or published prices for the same securities. Vanguard fund share prices can be found daily in the mutual fund listings of most major newspapers under various "Vanguard" headings. FINANCIAL HIGHLIGHTS The following financial highlights tables are intended to help you understand the Fund's financial performance for the periods shown, and certain information reflects financial results for a single Fund share. The total returns in each table represent the rate that an investor would have earned or lost each period on an investment in the Fund (assuming reinvestment of all distributions). This information has been derived from the financial statements audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, whose report--along with the Fund's financial statements--is included in the Fund's most recent annual report to shareholders. To receive a free copy of the latest annual or semiannual report, you may access a report online at www.vanguard.com or you may contact Vanguard by telephone or by mail. 14 ================================================================================ PLAIN TALK ABOUT HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE This explanation uses the Fund's Investor Shares as an example. The Investor Shares began fiscal year 2004 with a net asset value (price) of $xx.xx per share. During the year, each Investor Share earned $x.xx from investment income (interest and dividends) and $x.xx from investments that had appreciated in value or that were sold for higher prices than the Fund paid for them. Shareholders received $x.xx per share in the form of dividend distributions. A portion of each year's distributions may come from the prior year's income or capital gains. The share price at the end of the year was $xx.xx, reflecting earnings of $x.xx per share and distributions of $x.xx per share. This was an increase of $x.xx per share (from $xx.xx at the beginning of the year to $xx.xx at the end of the year). For a shareholder who reinvested the distributions in the purchase of more shares, the total return was xx.xx% for the year. As of October 31, 2004, the Investor Shares had approximately $xx.x billion in net assets. For the year, the expense ratio was 0.xx% ($x.x0 per $1,000 of net assets), and the net investment income amounted to x.xx% of average net assets. The Fund sold and replaced securities valued at xx% of its net assets. ================================================================================
WINDSOR FUND INVESTOR SHARES YEAR ENDED OCTOBER 31, --------------------------------------------------------------------- 2004 2003 2002 2001 2000 - ----------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $15.23 $11.81 $14.27 $16.44 $16.91 - ----------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income xxx .17 .164 .22 .28 Net Realized and Unrealized Gain (Loss) on Investments xxx 3.42 (2.143) (.29) 1.44 - ----------------------------------------------------------------------------------------------------------- Total from Investment Operations xxx 3.59 (1.979) (.07) 1.72 - ----------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income xxx (0.17) (.169) (.25) (.29) Distributions from Realized Capital Gains xxx -- (.312) (1.85) (1.90) - ----------------------------------------------------------------------------------------------------------- Total Distributions xxx (0.17) (.481) (2.10) (2.19) - ----------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $xxx $15.23 $11.81 $14.27 $16.44 - ----------------------------------------------------------------------------------------------------------- TOTAL RETURN xxx% 30.66% -14.55% -0.37% 11.60% - ----------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $xxx $13,733 $11,012 $15,761 $15,935 Ratio of Total Expenses to Average Net Assets xxx% 0.48% 0.45% 0.41% 0.31% Ratio of Net Investment Income to Average Net Assets xxx% 1.27% 1.16% 1.37% 1.75% Turnover Rate xxx% 23% 30% 33% 41% - -----------------------------------------------------------------------------------------------------------
15
WINDSOR FUND ADMIRAL SHARES - ---------------------------------------------------------------------------------------------------------- YEAR ENDED NOV. 12, OCTOBER 31, 2001* TO ------------------------- OCT. 31, 2004 2003 2002 - -------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $51.41 $39.88 $50.00 - ---------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income xxx .605 .556 Net Realized and Unrealized Gain (Loss) on Investments xxx 11.537 (9.030) - ---------------------------------------------------------------------------------------------------------- Total from Investment Operations xxx 12.142 (8.474) - ---------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income xxx (.612) (.592) Distributions from Realized Capital Gains xxx -- (1.054) - ---------------------------------------------------------------------------------------------------------- Total Distributions xxx (.612) (1.646) - ---------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD xxx $51.41 $39.88 - ---------------------------------------------------------------------------------------------------------- TOTAL RETURN xxx 30.72% -17.61% - ---------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) xxx $3,321 $2,214 Ratio of Total Expenses to Average Net Assets xxx 0.37% 0.40%** Ratio of Net Investment Income to Average Net Assets xxx 1.36% 1.22%** Turnover Rate xxx 23% 30% - ---------------------------------------------------------------------------------------------------------- *Inception. **Annualized.
16 ================================================================================ INVESTING WITH VANGUARD This section of the prospectus explains the basics of doing business with Vanguard. Vanguard reserves the right to change these policies, without advance notice to shareholders. BUYING SHARES CONVERTING SHARES REDEEMING SHARES EXCHANGING SHARES OTHER RULES YOU SHOULD KNOW FUND AND ACCOUNT UPDATES CONTACTING VANGUARD ================================================================================ BUYING SHARES ACCOUNT MINIMUMS FOR INVESTOR SHARES TO OPEN AND MAINTAIN AN ACCOUNT. $3,000 for regular accounts; $1,000 for IRAs (excluding SEP-IRAs) and most custodial accounts for minors. TO ADD TO AN EXISTING ACCOUNT. $50 by Automatic Investment Plan; $100 by check, exchange, or electronic bank transfer (other than Automatic Investment Plan); $1,000 by wire. Vanguard reserves the right to increase or decrease the minimum amount required to open or maintain an account, or to add to an existing account, without prior notice. ACCOUNT MINIMUMS FOR ADMIRAL SHARES TO OPEN AND MAINTAIN AN ACCOUNT. $250,000 for new investors; $150,000 or $50,000 for existing investors who are eligible to convert Investor Shares into Admiral Shares, depending on tenure in the fund. See Converting Shares. Institutional clients should contact Vanguard for information on special rules that may apply to them. See Converting Shares. TO ADD TO AN EXISTING ACCOUNT. $50 by Automatic Investment Plan; $100 by check, exchange, or electronic bank transfer (other than Automatic Investment Plan); $1,000 by wire. HOW TO BUY SHARES ONLINE TRANSACTIONS. On our website at www.vanguard.com, you may open certain types of accounts, initiate electronic bank transfers, and exchange the proceeds of a redemption from one fund to a new or existing fund account. BY CHECK. To open an account, mail your check and a completed account registration form to Vanguard. When adding to an existing account, send your check with an Invest-by-Mail form detached from your last account statement. Make your check payable to: The Vanguard Group--"Fund number". For a list of the Fund numbers and addresses, see Contacting Vanguard. 17 BY EXCHANGE PURCHASE. You can purchase shares by telephone or mail with the proceeds of a redemption from another Vanguard fund. See Exchanging Shares and Other Rules You Should Know. BY WIRE. Call Vanguard to purchase shares by wire. See Contacting Vanguard. BY ELECTRONIC BANK TRANSFER. In order to perform electronic bank transfers, you must designate a bank account by completing a special form or the appropriate section of your account registration form. Then you can make purchases on a regular schedule (Automatic Investment Plan) or whenever you wish by electronic bank transfer. Your transaction can be accomplished online, by telephone, or by mail if your request is in good order. For further information about these options, consult our website at www.vanguard.com or see Contacting Vanguard. GOOD ORDER. You must include complete and accurate required information on your purchase request. See Other Rules You Should Know--Good Order. The requirements vary among types of accounts and transactions. YOUR PURCHASE PRICE BY CHECK (TO PURCHASE ALL FUNDS OTHER THAN MONEY MARKET FUNDS), BY EXCHANGE, OR BY WIRE. You buy shares at a fund's NAV determined as of your TRADE DATE. A purchase request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) receives a trade date of the same day, and a purchase request received after that time receives a trade date of the first business day following the date of receipt. BY CHECK (TO PURCHASE MONEY MARKET FUNDS ONLY). For a check purchase request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time), the trade date is the first business day following the date of receipt. For a purchase request received after that time, the trade date is the second business day following the date of receipt. Because money market instruments must be purchased with federal funds and it takes a money market mutual fund one business day to convert check proceeds into federal funds, the trade date is always one day later than for other funds. BY ELECTRONIC BANK TRANSFER (OTHER THAN AUTOMATIC INVESTMENT PLAN). For all Vanguard funds, a purchase request received by Vanguard on a business day before 10 p.m., Eastern time, will receive a trade date of the next business day. 18 BY ELECTRONIC BANK TRANSFER (WITH AUTOMATIC INVESTMENT PLAN). Your Vanguard account's trade date will be one business day before the date you designated for withdrawal from your bank account. For further information about these options, consult our website at www.vanguard.com or see Contacting Vanguard. PURCHASE RULES YOU SHOULD KNOW ^ADMIRAL SHARES. Please note that Admiral Shares are NOT available for: - - SIMPLE IRAs and 403(b)(7) custodial accounts; - - Other retirement plan accounts receiving special administrative services from Vanguard; or - - Accounts maintained by financial intermediaries, except in limited circumstances. ^CHECK PURCHASES. All purchase checks must be written in U.S. dollars and drawn on a U.S. bank. Vanguard does not accept cash, traveler's checks, or money orders. In addition, to protect the funds from fraud, Vanguard may refuse "starter checks" and checks made payable to third parties. ^NEW ACCOUNTS. We are required by law to obtain from you certain personal information that we will use to verify your identity. If you do not provide the information, we may not be able to open your account. If we are unable to verify your identity, Vanguard reserves the right to close your account or take such other steps as we deem reasonable. ^REJECTION OF PURCHASES. Vanguard reserves the right to reject any purchase request at any time and without notice. This includes the right to reject any purchase request because of a history of frequent trading by the investor, or that may disrupt a fund's operation or performance. Please call us before attempting to invest a large dollar amount. ^NO CANCELLATIONS. Place your transaction requests carefully. Vanguard will NOT cancel any transaction once it has been initiated and a confirmation number has been assigned (if applicable). ^FUTURE PURCHASES. All Vanguard funds reserve the right to stop selling shares or to reject specific purchase requests, including purchases by exchange from another Vanguard fund. These rights apply at any time, for any reason, and without notice. 19 CONVERTING SHARES A CONVERSION BETWEEN SHARE CLASSES OF THE SAME FUND IS A NONTAXABLE EVENT. PRICING OF SHARE CLASS CONVERSIONS If you convert from one class of shares to another, the transaction will be based on the respective share prices of the separate classes on the trade date for the conversion. Consequently, a conversion may provide you with fewer shares or more shares than you originally owned, depending on that day's share prices. At the time of conversion, the total value of your "old" shares will equal the total value of your "new" shares. However, subsequent share price fluctuations may decrease or increase the total value of your "new" shares as compared with that of your "old" shares. IMMEDIATE CONVERSIONS INTO ADMIRAL SHARES All shares purchased before the issuance of Admiral Shares are considered Investor Shares. You may convert Investor Shares into Admiral Shares at any time if your account balance in the Fund is at least $250,000. Registered users of Vanguard.com may request a conversion to Admiral Shares online, or you may contact Vanguard by telephone or mail to request this transaction. TENURE CONVERSIONS INTO ADMIRAL SHARES THREE-YEAR PRIVILEGE. After three years in the Fund, you may convert Investor Shares into Admiral Shares if your account balance in the Fund is at least $150,000 and you are registered with Vanguard.com. TEN-YEAR PRIVILEGE. After ten years in the Fund, you may convert Investor Shares into Admiral Shares if your account balance in the Fund is at least $50,000 and you are registered with Vanguard.com. Registered users of Vanguard.com may request a tenure conversion online, or you may contact Vanguard's Admiral Service Center by telephone or mail to request this transaction. MANDATORY CONVERSIONS INTO INVESTOR SHARES If an investor no longer meets the requirements for Admiral Shares, the Fund may convert the investor's Admiral Shares into Investor Shares. A decline in the investor's account balance because of market movement may result in such a conversion. The Fund will notify the investor in writing before any mandatory conversion into Investor Shares. 20 REDEEMING SHARES HOW TO REDEEM SHARES Be sure to check Other Rules You Should Know before initiating your request. ONLINE TRANSACTIONS. You may perform a redemption, initiate electronic bank transfers, and exchange the proceeds of a redemption from one fund to purchase shares of another fund through our website at www.vanguard.com. BY TELEPHONE. Contact Vanguard by telephone to request a redemption. For telephone numbers, see Contacting Vanguard. BY MAIL. Send your written redemption instructions in good order to Vanguard. For addresses, see Contacting Vanguard. BY ELECTRONIC BANK TRANSFER. In order to perform electronic bank transfers, you must designate a bank account by completing a special form or the appropriate section of your account registration form. Then you can make redemptions on a regular schedule (Automatic Withdrawal Plan) or whenever you wish by electronic bank transfer. Your transaction can be accomplished online, by telephone, or by mail if your request is in good order. For further information about these options, consult our website at www.vanguard.com or see Contacting Vanguard. GOOD ORDER. You must include complete and accurate required information on your redemption request. See Other Rules You Should Know--Good Order. The requirements vary among types of accounts and transactions. YOUR REDEMPTION PRICE You redeem shares at a fund's next-determined NAV after Vanguard receives your redemption request, including any special documentation required under the circumstances. As long as your request is received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time), your shares are redeemed at that day's NAV. This is known as your TRADE DATE. TYPES OF REDEMPTIONS ^BY CHECK. Unless instructed otherwise, Vanguard will mail you a check, normally within two business days of your trade date. ^BY EXCHANGE. You may instruct Vanguard to apply the proceeds of your redemption to purchase shares of another Vanguard fund. See Exchanging Shares and Other Rules You Should Know. ^BY AUTOMATIC WITHDRAWAL PLAN OR OTHER ELECTRONIC BANK TRANSFER. Proceeds of redeemed shares will be credited to your bank account two business days after your trade date. Minimum electronic redemption is $100. ^BY WIRE. When redeeming from a money market fund or a bond fund, you may instruct Vanguard to wire your redemption proceeds ($1,000 minimum) to a previously designated bank 21 account. Wire redemptions generally are not available for Vanguard's balanced or stock funds. The wire redemption option is not automatic; you must establish it either online or by completing a special form or the appropriate section of your account registration form. Vanguard charges a $5 fee for wire redemptions under $5,000. Money Market Funds: For telephone requests received by Vanguard by 10:45 a.m., Eastern time (2 p.m., Eastern time, for Vanguard(R) Prime Money Market Fund), the redemption proceeds will leave Vanguard by the close of business that same day. For other requests received before 4 p.m., Eastern time, the redemption proceeds will leave Vanguard by the close of business on the following business day. Bond Funds: For requests received by Vanguard by 4 p.m., Eastern time, the redemption proceeds will leave Vanguard by the close of business on the following business day. REDEMPTION RULES YOU SHOULD KNOW ^SPECIAL ACCOUNTS. Special documentation may be required to redeem from certain types of accounts, such as trust, corporate, nonprofit, or retirement accounts. Please call us before attempting to redeem from these types of accounts. ^POTENTIALLY DISRUPTIVE REDEMPTIONS. Vanguard reserves the right to pay all or part of your redemption in kind--that is, in the form of securities--if we reasonably believe that a cash redemption would disrupt the fund's operation or performance or that the shareholder may be engaged in frequent trading. Under these circumstances, Vanguard also reserves the right to delay payment of your redemption proceeds for up to seven calendar days. By calling us before you attempt to redeem a large dollar amount, you may avoid in-kind or delayed payment of your redemption. ^RECENTLY PURCHASED SHARES. Although you can redeem shares at any time, proceeds may not be made available to you until the Fund collects payment for your purchase. This may take up to ten calendar days for shares purchased by check or by electronic bank transfer. If you have written a check on a Fund with checkwriting privileges, that check may be rejected if the Fund does not have sufficient proceeds for payment. ^SHARE CERTIFICATES. If share certificates have been issued for your account, those shares cannot be redeemed until you return the certificates (unsigned) to Vanguard by registered mail. For the correct address, see Contacting Vanguard. ^ADDRESS CHANGE. If you change your address online or by telephone, there may be a 15-day hold on online and telephone redemptions. Address change confirmations are sent to both the old and new addresses. ^PAYMENT TO A DIFFERENT PERSON OR ADDRESS. At your request, we can make your redemption check payable to a different person or send it to a different address. However, 22 this requires the written consent of all registered account owners and may require a signature guarantee. You can obtain a signature guarantee from most commercial and savings banks, credit unions, trust companies, or member firms of a U.S. stock exchange. A notary public cannot provide a signature guarantee. ^NO CANCELLATIONS. Place your transaction requests carefully. Vanguard will NOT cancel any transaction once it has been initiated and a confirmation number has been assigned (if applicable). ^EMERGENCY CIRCUMSTANCES. Vanguard funds can postpone payment of redemption proceeds for up to seven calendar days. In addition, Vanguard funds can suspend redemptions and/or postpone payments of redemption proceeds beyond seven calendar days at times when the New York Stock Exchange is closed or during emergency circumstances, as determined by the U.S. Securities and Exchange Commission. EXCHANGING SHARES An exchange is the redemption of assets from one Vanguard fund that are used to purchase shares in another Vanguard fund. All open Vanguard funds accept exchange requests online (through your account registered with Vanguard.com), by telephone, or by mail. However, because excessive exchanges can disrupt management of a fund and increase the fund's costs for all shareholders, Vanguard places certain limits on the exchange privilege. For the U.S. STOCK INDEX FUNDS, 500 INDEX FUND, U.S. SECTOR INDEX FUNDS, INTERNATIONAL STOCK INDEX FUNDS, DEVELOPED MARKETS INDEX FUND, TOTAL INTERNATIONAL STOCK INDEX FUND, INSTITUTIONAL DEVELOPED MARKETS INDEX FUND, REIT INDEX FUND, BALANCED INDEX FUND, CALVERT SOCIAL INDEX FUND, INTERNATIONAL GROWTH FUND, INTERNATIONAL VALUE FUND, INTERNATIONAL EXPLORER(TM) FUND, or GROWTH AND INCOME FUND, you may request no more than two exchanges OUT of the fund online or by telephone within any 12-month period. Funds may be added to or deleted from this list at any time, without notice to shareholders. 23 For ALL VANGUARD FUNDS, the following limit generally applies: - - No more than two substantive "round trips" through a non-money-market fund during any 12-month period. A "round trip" is an exchange redemption OUT of a fund (by any means) followed by an exchange purchase back INTO the same fund (by any means). "Substantive" means a dollar amount that Vanguard determines, in its sole discretion, could adversely affect management of the fund. This limit does not apply to certain categories of transactions that Vanguard reasonably believes may not raise frequent- trading or market-timing concerns. These categories are: - - Systematic transactions, including those under Vanguard's Automatic Investment Plan, Automatic Exchange Service, Automatic Withdrawal Plan, and other rebalancing programs reviewed by Vanguard. - - Transactions within certain Vanguard advisory programs (such as Asset Management Services and Vanguard Fiduciary Services(R)). - - Transactions within certain retirement plans administered by Vanguard, for which other policies apply. This limit also will not apply if it would violate a law, regulation, or court order. This limit does not apply to omnibus accounts held through intermediaries. Please also see Other Rules You Should Know--Investing With Vanguard Through Other Firms regarding accounts held through intermediaries. Please note that Vanguard reserves the right to revise or terminate the exchange privilege, limit the amount of any exchange, or reject an exchange, at any time, for any reason. Also, in the event of a conflict between the exchange- privilege limitations of two funds, the stricter policy will apply to the transaction. OTHER RULES YOU SHOULD KNOW VANGUARD.COM(R) ^REGISTRATION. You can use your personal computer to review your account holdings, to buy, sell, or exchange shares of most Vanguard funds, and to perform most other transactions. To establish this service, you must register online. ^ELECTRONIC DELIVERY. Vanguard can deliver your account statements, transaction confirmations, and fund financial reports electronically. If you are a registered user of Vanguard.com, you can consent to the electronic delivery of these documents by logging on and changing your mailing preference under "My Profile". You can revoke your electronic consent at any time, and 24 we will begin to send paper copies of these documents within 30 days of receiving your notice. TELEPHONE TRANSACTIONS ^AUTOMATIC. When we set up your account, we'll automatically enable you to do business with us by telephone, unless you instruct us otherwise in writing. ^TELE-ACCOUNT(R). To conduct account transactions through Vanguard's automated telephone service, you must first obtain a Personal Identification Number (PIN). Call Tele-Account at 1-800-662-6273 to obtain a PIN, and allow seven days after requesting the PIN before using this service. ^PROOF OF A CALLER'S AUTHORITY. We reserve the right to refuse a telephone request if the caller is unable to provide the following information exactly as registered on the account: - - Authorization to act on the account (as the account owner or by legal documentation or other means). - - Account registration and address. - - Social Security or employer identification number. - - Fund name and account number, if applicable. ^SUBJECT TO REVISION. We reserve the right to revise or terminate Vanguard's telephone transaction service at any time, without notice. GOOD ORDER We reserve the right to reject any transaction instructions that are not in "good order." The requirements vary among types of accounts and transactions. Good order means that your instructions must include: - - The fund name and account number. - - The amount of the transaction (stated in dollars, shares, or percent). Written instructions also must include: - - Authorized signatures of all registered owners. - - Signature guarantees, if required for the type of transaction.* - - Any supporting legal documentation that may be required. *Call Vanguard for specific signature-guarantee requirements. FUTURE TRADE DATE REQUESTS Vanguard does not accept requests to hold a purchase, redemption, or exchange transaction for a future date. All such requests will receive trade dates as previously described in Investing With Vanguard--Buying, Converting, Redeeming, and Exchanging Shares. ACCOUNTS WITH MORE THAN ONE OWNER If an account has more than one owner or authorized person, Vanguard will accept telephone or online instructions from any one owner or authorized person. 25 RESPONSIBILITY FOR FRAUD Vanguard will not be responsible for any account losses because of fraud, so long as we reasonably believe that the person transacting business on an account is authorized to do so. Please take precautions to protect yourself from fraud. Keep your account information private and immediately review any account statements that we send to you. It is important that you contact Vanguard immediately about any transactions you believe to be unauthorized. UNCASHED CHECKS Please cash your distribution or redemption checks promptly. Vanguard will not pay interest on uncashed checks. UNUSUAL CIRCUMSTANCES If you experience difficulty contacting Vanguard online, by telephone, or by Tele-Account, you can send us your transaction request by regular or express mail. See Contacting Vanguard for addresses. INVESTING WITH VANGUARD THROUGH OTHER FIRMS You may purchase or sell Investor Shares of most Vanguard funds through a financial intermediary, such as a bank, broker, or investment advisor. HOWEVER, ACCESS TO ADMIRAL SHARES THROUGH A FINANCIAL INTERMEDIARY IS RESTRICTED. PLEASE CONSULT YOUR FINANCIAL INTERMEDIARY TO DETERMINE WHETHER ADMIRAL SHARES ARE AVAILABLE THROUGH THAT FIRM. When intermediaries establish omnibus accounts in the Vanguard funds for their clients, we cannot monitor the individual clients' trading activity. However, we review trading activity at the omnibus account level, and we look for activity that may indicate potential frequent trading or market-timing. If we detect suspicious trading activity, we will seek the assistance of the intermediary to investigate that trading activity and take appropriate action, including prohibiting additional purchases of fund shares by a client. Intermediaries may apply frequent-trading policies that differ from those described in this prospectus. If you invest with Vanguard through an intermediary, please read that firm's program materials carefully to learn of any rules or fees that may apply. LOW-BALANCE ACCOUNTS All Vanguard funds reserve the right to liquidate any investment-only retirement-plan account or any nonretirement account whose balance falls below the minimum initial investment. If a fund has a redemption fee, that fee will apply to shares redeemed upon closure of the account. For most nonretirement accounts, Vanguard deducts a $10 fee in June if the fund account balance is below $2,500. This fee can be waived if your total Vanguard account assets are $50,000 or more. 26 CUSTODIAL FEES Vanguard charges a custodial fee of $10 a year for each IRA fund account with a balance of less than $5,000. The fee can be waived if you have assets totaling $50,000 or more at Vanguard in any combination of accounts under your Social Security number, including IRAs, employer-sponsored retirement plans, brokerage accounts, annuities, and non-IRA accounts. RIGHT TO CHANGE POLICIES In addition to the rights expressly stated elsewhere in this prospectus, Vanguard reserves the right to (1) alter, add, or discontinue any conditions of purchase, service, or privilege at any time without notice; (2) accept initial purchases by telephone; (3) freeze any account and suspend account services when Vanguard has received reasonable notice of a dispute between the registered or beneficial account owners or when we reasonably believe a fraudulent transaction may occur or has occurred; (4) alter, impose, discontinue, or waive any redemption, low-balance account, account maintenance, or other fees charged to a group of shareholders; and (5) redeem an account, without the owner's permission to do so, in cases of threatening conduct or suspicious, fraudulent, or illegal activity. Changes may affect all investors or only those in certain classes or groups. These actions will be taken when, in the sole discretion of Vanguard management, we reasonably believe they are deemed to be in the best interest of a fund. FUND AND ACCOUNT UPDATES CONFIRMATION STATEMENTS We will send a confirmation statement to verify your trade date and the amount of your transaction when you buy, sell, exchange, or convert shares. However, we will not send such statements if they reflect only money market checkwriting or the reinvestment of dividend or capital gains distributions. Promptly review each confirmation statement that we send to you. It is important that you contact Vanguard immediately with any questions you may have about any transaction reflected on the confirmation statement. PORTFOLIO SUMMARIES We will send quarterly portfolio summaries to help you keep track of your accounts throughout the year. Each summary shows the market value of your account at the close of the statement period, as well as all distributions, purchases, redemptions, exchanges, transfers, and conversions for the current calendar year. Promptly review each summary that we send to you. It is important that you contact Vanguard immediately with any questions you may have about any transaction reflected on the summary. 27 TAX STATEMENTS We will send annual tax statements to assist you in preparing your income tax returns. These statements, which are generally mailed in January, will report the previous year's dividend and capital gains distributions, proceeds from the sale of shares, and distributions from IRAs and other retirement plans. AVERAGE-COST REVIEW STATEMENTS For most taxable accounts, average-cost review statements will accompany annual 1099B tax statements. These statements show the average cost of shares that you redeemed during the previous calendar year, using the average-cost single-category method, which is one of the methods established by the IRS. ANNUAL AND SEMIANNUAL REPORTS We will send you (electronically or by mail, as you prefer) financial reports about Vanguard Windsor Fund twice a year, in June and December. These comprehensive reports include overviews of the financial markets and provide the following specific Fund information: - - Performance assessments with comparisons to industry benchmarks. - - Reports from the advisors. - - Financial statements with detailed listings of the Fund's holdings. Vanguard attempts to eliminate the unnecessary expense of duplicate mailings by sending just one report when two or more shareholders have the same last name and address. You may request individual reports by contacting our Client Services Department in writing, by telephone, or by e-mail. PORTFOLIO HOLDINGS We generally post on our website at www.vanguard.com a detailed list of the securities held in the Fund (portfolio holdings) as of the most recent calendar-quarter end in the "Holdings" section of the Fund's Profile page, 30 days after the end of the calendar quarter. Vanguard may exclude any portion of these portfolio holdings from publication when deemed in the best interest of the Fund. We generally post on our website at www.vanguard.com the ten largest stock portfolio holdings of the Fund, and the percentage that each of these holdings represents of the Fund's total assets, as of the most recent calendar- quarter end in the "Holdings" section of the Fund's Profile page, 15 calendar days after the end of the calendar quarter. Please consult the Fund's Statement of Additional Information or our website for a description of the policies and procedures that govern disclosure of the Fund's portfolio holdings. 28 CONTACTING VANGUARD ONLINE VANGUARD.COM - - For the most complete source of Vanguard news - - For fund, account, and service information - - For most account transactions - - For literature requests - - 24 hours a day, 7 days a week VANGUARD TELE-ACCOUNT(R) 1-800-662-6273 (ON-BOARD) - - For automated fund and account information - - For redemptions by check, exchange (subject to certain limitations), or wire - - Toll-free, 24 hours a day, 7 days a week INVESTOR INFORMATION 1-800-662-7447 (SHIP) (Text telephone at 1-800-952-3335) - - For fund and service information - - For literature requests - - Business hours only CLIENT SERVICES 1-800-662-2739 (CREW) (Text telephone at 1-800-749-7273) - - For account information - - For most account transactions - - Business hours only ADMIRAL SERVICE CENTER 1-888-237-9949 - - For Admiral account information - - For most Admiral transactions - - Business hours only INSTITUTIONAL DIVISION 1-888-809-8102 - - For information and services for large institutional investors - - Business hours only INTERMEDIARY SALES SUPPORT 1-800-997-2798 - - For information and services for financial intermediaries including broker- dealers, trust institutions, insurance companies, and financial advisors - - Business hours only VANGUARD ADDRESSES Please be sure to use the correct address, depending on your method of delivery. Use of an incorrect address could delay the processing of your transaction. REGULAR MAIL (INDIVIDUALS): The Vanguard Group P.O. Box 1110 Valley Forge, PA 19482-1110 REGULAR MAIL (INSTITUTIONS): The Vanguard Group P.O. Box 2900 Valley Forge, PA 19482-2900 29 REGISTERED, EXPRESS, OR OVERNIGHT MAIL: The Vanguard Group 455 Devon Park Drive Wayne, PA 19087-1815 FUND NUMBERS Please use the specific fund number when contacting us about Vanguard Windsor Fund--22 (Investor Shares) or 5022 (Admiral Shares). The Vanguard Group, Vanguard, Vanguard.com, Plain Talk, Admiral, Vanguard Tele-Account, Tele-Account, Explorer, VIPER, Vanguard Fiduciary Services, and the ship logo are trademarks of The Vanguard Group, Inc. Calvert Social Index is a trademark of Calvert Group, Ltd., and has been licensed for use by The Vanguard Group, Inc. Vanguard Calvert Social Index Fund is not sponsored, endorsed, sold, or promoted by Calvert Group, Ltd., and Calvert Group, Ltd., makes no representation regarding the advisability of investing in the fund. All other marks are the exclusive property of their respective owners. (THIS PAGE INTENTIONALLY LEFT BLANK.) (THIS PAGE INTENTIONALLY LEFT BLANK.) (THIS PAGE INTENTIONALLY LEFT BLANK.) GLOSSARY OF INVESTMENT TERMS CAPITAL GAINS DISTRIBUTION Payment to mutual fund shareholders of gains realized on securities that a fund has sold at a profit, minus any realized losses. CASH INVESTMENTS Cash deposits, short-term bank deposits, and money market instruments that include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase agreements, commercial paper, and banker's acceptances. COMMON STOCK A security representing ownership rights in a corporation. A stockholder is entitled to share in the company's profits, some of which may be paid out as dividends. DIVIDEND DISTRIBUTION Payment to mutual fund shareholders of income from interest or dividends generated by a fund's investments. EXPENSE RATIO The percentage of a fund's average net assets used to pay its expenses during a fiscal year. The expense ratio includes management fees, administrative fees, and any 12b-1 distribution fees. It does not include the transaction costs of buying and selling portfolio securities. GROWTH FUND A mutual fund that emphasizes stocks of companies believed to have above-average prospects for growth in revenue and earnings. These stocks typically have low dividend yields and above-average prices in relation to such measures as earnings and book value. INVESTMENT ADVISOR An organization that makes the day-to-day decisions regarding a fund's investments. MEDIAN MARKET CAP An indicator of the size of companies in which a fund invests; the midpoint of market capitalization (market price x shares outstanding) of a fund's stocks, weighted by the proportion of the fund's assets invested in each stock. Stocks representing half of the fund's assets have market capitalizations above the median, and the rest are below it. MUTUAL FUND An investment company that pools the money of many people and invests it in a variety of securities in an effort to achieve a specific objective over time. NET ASSET VALUE (NAV) The market value of a mutual fund's total assets, minus liabilities, divided by the number of shares outstanding. The value of a single share is also called its share value or share price. PRICE/EARNINGS (P/E) RATIO The current share price of a stock, divided by its per-share earnings (profits). A stock selling for $20, with earnings of $2 per share, has a price/earnings ratio of 10. PRINCIPAL The face value of a debt instrument or the amount of money put into an investment. SECURITIES Stocks, bonds, money market instruments, and other investment vehicles. TOTAL RETURN A percentage change, over a specified time period, in a mutual fund's net asset value, assuming the reinvestment of all distributions of dividends and capital gains. VALUE FUND A mutual fund that emphasizes stocks whose prices typically are below-average in relation to such measures as earnings and book value. These stocks often have above-average dividend yields. VOLATILITY The fluctuations in value of a mutual fund or other security. The greater a fund's volatility, the wider the fluctuations in its returns. YIELD Income (interest or dividends) earned by an investment, expressed as a percentage of the investment's price. {SHIP GRAPHIC} THE VANGUARD GROUP (R) Post Office Box 2600 Valley Forge, PA 19482-2600 FOR MORE INFORMATION If you would like more information about Vanguard Windsor Fund, the following documents are available free upon request: ANNUAL/SEMIANNUAL REPORTS TO SHAREHOLDERS Additional information about the Fund's investments is available in the Fund's annual and semiannual reports to shareholders. In the annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Fund's performance during its last fiscal year. STATEMENT OF ADDITIONAL INFORMATION (SAI) The SAI provides more detailed information about the Fund. The current annual and semiannual reports and the SAI are incorporated by reference into (and are thus legally a part of) this prospectus. To receive a free copy of the latest annual or semiannual report or the SAI, or to request additional information about the Fund or other Vanguard funds, please contact us as follows: THE VANGUARD GROUP INVESTOR INFORMATION DEPARTMENT P.O. BOX 2600 VALLEY FORGE, PA 19482-2600 TELEPHONE: 1-800-662-7447 (SHIP) TEXT TELEPHONE: 1-800-952-3335 WORLD WIDE WEB: WWW.VANGUARD.COM If you are a current Vanguard shareholder and would like information about your account, account transactions, and/or account statements, please call: CLIENT SERVICES DEPARTMENT TELEPHONE: 1-800-662-2739 (CREW) TEXT TELEPHONE: 1-800-749-7273 INFORMATION PROVIDED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC) You can review and copy information about the Fund (including the SAI) at the SEC's Public Reference Room in Washington, DC. To find out more about this public service, call the SEC at 1-202-942-8090. Reports and other information about the Fund are also available in the EDGAR Database on the SEC's Internet site at http://www.sec.gov, or you can receive copies of this information, for a fee, by electronic request at the following e-mail address: publicinfo@sec. gov, or by writing the Public Reference Section, Securities and Exchange Commission, Washington, DC 20549-0102. Fund's Investment Company Act file number: 811-834 (C) 2005 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. P022 022005 VANGUARD(R) WINDSOR II FUND Investor Shares & Admiral(TM) Shares . February 18, 2005 This prospectus contains financial data for the Fund through the fiscal year ended October 31, 2004. STOCK NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE VANGUARD GROUP (R) VANGUARD WINDSOR II FUND Investor Shares and Admiral Shares Prospectus February 18, 2005 A Value Stock Mutual Fund ================================================================================ CONTENTS - -------------------------------------------------------------------------------- 1 FUND PROFILE 4 ADDITIONAL INFORMATION 4 MORE ON THE FUND 9 THE FUND AND VANGUARD 9 INVESTMENT ADVISORS 11 DIVIDENDS, CAPITAL GAINS, AND TAXES 13 SHARE PRICE 14 FINANCIAL HIGHLIGHTS 17 INVESTING WITH VANGUARD 17 Buying Shares 20 Converting Shares 21 Redeeming Shares 23 Exchanging Shares 24 Other Rules You Should Know 27 Fund and Account Updates 28 Contacting Vanguard GLOSSARY OF INVESTMENT TERMS ================================================================================ ================================================================================ WHY READING THIS PROSPECTUS IS IMPORTANT This prospectus explains the investment objective, policies, strategies, and risks associated with the Fund. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk(R) explanations along the way. Reading the prospectus will help you decide whether the Fund is the right investment for you. We suggest that you keep this prospectus for future reference. - ------------------------------------------------------------------------------- ================================================================================ SHARE CLASS OVERVIEW The Fund offers two separate classes of shares: Investor Shares and Admiral Shares. Please note that Admiral Shares are NOT available to: - - SIMPLE IRAs and 403(b)(7) custodial accounts; - - Other retirement plan accounts receiving special administrative services from Vanguard; or - - Accounts maintained by financial intermediaries, except in limited circumstances. The Fund's separate share classes have different expenses; as a result, their investment performances will differ. - ------------------------------------------------------------------------------- 1 FUND PROFILE INVESTMENT OBJECTIVE The Fund seeks to provide long-term capital appreciation and income. PRIMARY INVESTMENT STRATEGIES The Fund invests mainly in large- and mid-capitalization companies whose stocks are considered by the Fund's advisors to be undervalued. Undervalued stocks are generally those that are out of favor with investors and, in the opinion of the advisors, are trading at prices that are below-average in relation to such measures as earnings and book value. These stocks often have above-average dividend yields. The Fund uses multiple investment advisors. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. The Fund's performance could be hurt by: - - Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. - - Investment style risk, which is the chance that returns from large- and mid-capitalization value stocks will trail returns from the overall stock market. Historically, mid-cap stocks have been more volatile in price than the large-cap stocks that dominate the overall market, and they often perform quite differently. - - Manager risk, which is the chance that poor security selection will cause the Fund to underperform relevant benchmarks or other funds with a similar investment objective. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund's Investor Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the share classes presented compare with those of relevent market indexes. Keep in mind that the Fund's past returns (before and after taxes) do not indicate how it will perform in the future. ---------------------------------------------------- ANNUAL TOTAL RETURNS--INVESTOR SHARES (BAR CHART HERE) ---------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was x.xx% (quarter ended month dd, yyyy), and the lowest return for a quarter was -x.xx% (quarter ended month dd, yyyy). 2 AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2004 - -------------------------------------------------------------------------------- 1 YEAR 5 YEARS 10 YEARS - -------------------------------------------------------------------------------- VANGUARD WINDSOR II FUND INVESTOR SHARES Return Before Taxes xx.xx% xx.xx% xx.xx% Return After Taxes on Distributions xx.xx xx.xx xx.xx Return After Taxes on Distributions and Sale of Fund Shares xx.xx xx.xx xx.xx - -------------------------------------------------------------------------------- VANGUARD WINDSOR II ADMIRAL SHARES* Return Before Taxes xx.xx% xx.xx% xx.xx% - -------------------------------------------------------------------------------- COMPARATIVE INDEXES (reflect no deduction for fees, expenses, or taxes): RUSSELL 1000 VALUE INDEX xx.xx% xx.xx% xx.xx% STANDARD & POOR'S 500 INDEX xx.xx xx.xx xx.xx - -------------------------------------------------------------------------------- NOTE ON AFTER-TAX RETURNS. Actual after-tax returns depend on your tax situation and may differ from those shown in the preceding table. When calculating after-tax return figures for a fund, we assume the shareholder was in the highest federal marginal income tax bracket at the time of each distribution of income or capital gains, but we do not consider state or local income taxes. Please note that actual after-tax returns will vary for a fund's separate share classes and are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares will be higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder. FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Investor Shares or Admiral Shares of the Fund. Transaction costs incurred by the Fund for buying and selling securities are not reflected in the table. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended October 31, 2004. INVESTOR ADMIRAL SHARES SHARES SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None None Purchase Fee: None None Sales Charge (Load) Imposed on Reinvested Dividends: None None Redemption Fee None None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.xx% 0.xx% 12b-1 Distribution Fee: None None Other Expenses: 0.xx% 0.xx% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.XX% 0.XX% 3 The following examples are intended to help you compare the cost of investing in the Fund's Investor Shares or Admiral Shares with the cost of investing in other mutual funds. They illustrate the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. These examples assume that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. 1 YEAR 3 YEARS 5 YEARS 10 YEARS - --------------------------------------------------------- Investor Shares $xx $xxx $xxx $xxx Admiral Shares xx xxx xxx xxx - --------------------------------------------------------- THESE EXAMPLES SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. ================================================================================ PLAIN TALK ABOUT FUND EXPENSES All mutual funds have operating expenses. These expenses, which are deducted from a fund's gross income, are expressed as a percentage of the net assets of the fund. Vanguard Windsor II Fund's expense ratios in fiscal year 2004 were as follows: for Investor Shares, 0.xx%, or $x.x0 per $1,000 of average net assets; for Admiral Shares, 0.xx%, or $x.x0 per $1,000 of average net assets. The average large-cap value mutual fund had expenses in 2003 of x.xx%, or $xx.x0 per $1,000 of average net assets (derived from data provided by Lipper Inc., which reports on the mutual fund industry). Management expenses, which are one part of operating expenses, include investment advisory fees as well as other costs of managing a fund--such as account maintenance, reporting, accounting, legal, and other administrative expenses. ================================================================================ ================================================================================ PLAIN TALK ABOUT COSTS OF INVESTING Costs are an important consideration in choosing a mutual fund. That's because you, as a shareholder, pay the costs of operating a fund, plus any transaction costs incurred when the fund buys or sells securities. These costs can erode a substantial portion of the gross income or the capital appreciation a fund achieves. Even seemingly small differences in expenses can, over time, have a dramatic effect on a fund's performance. ================================================================================ 4 ================================================================================ ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT Dividends are distributed Investor Shares--$3,000; $1,000 for IRAs semiannually in June and December; (excluding SEP-IRAs) and most custodial capital gains, if any, are distributed accounts for minors annually in December Admiral Shares--$250,000 INVESTMENT ADVISORS - -Barrow, Hanley, Mewhinney & CONVERSION FEATURES Strauss, Inc., Dallas, Tex., since Investor Shares--May be converted to inception Admiral Shares if you meet certain account - -Equinox Capital Management, LLC, balance and tenure requirements New York City, N.Y., since 1991 Admiral Shares--May be converted to - -Hotchkis and Wiley Capital Investor Shares if you are no longer Management, LLC, Los Angeles, eligible for Admiral Shares Calif., since 2003 - -Tukman Capital Management, Inc., NEWSPAPER ABBREVIATION Larkspur, Calif., since 1991 Investor Shares--WndsrII - -The Vanguard Group, Valley Forge, Admiral Shares--WndsrIIAdml Pa., since 1991 VANGUARD FUND NUMBER Investor Shares--73 INCEPTION DATE Admiral Shares--573 Investor Shares--June 24, 1985 Admiral Shares--May 14, 2001 CUSIP NUMBER Investor Shares--922018205 NET ASSETS (ALL SHARE CLASSES) AS Admiral Shares--922018304 OF OCTOBER 31, 2004 $xx.x billion TICKER SYMBOL Investor Shares--VWNFX SUITABLE FOR IRAS Admiral Shares--VWNAX Yes ================================================================================ MORE ON THE FUND This prospectus describes the primary risks you would face as a Fund shareholder. It is important to keep in mind one of the main axioms of investing: The higher the risk of losing money, the higher the potential reward. The reverse, also, is generally true: The lower the risk, the lower the potential reward. As you consider an investment in any mutual fund, you should take into account your personal tolerance for daily fluctuations in the securities markets. Look for this FLAG symbol throughout the prospectus. It is used to mark detailed information about the more significant risks that you would confront as a Fund shareholder. The following sections explain the primary investment strategies and policies that the Fund uses in pursuit of its objective. The Fund's board of trustees, which oversees the Fund's management, may change investment strategies or policies in the interest of shareholders without a shareholder vote, unless those strategies or policies are designated as fundamental. MARKET EXPOSURE The Fund invests mainly in the common stocks of large- and mid-capitalization companies that are considered by the Fund's advisors to be undervalued. Undervalued stocks are generally those that are out of favor with investors and, in the opinion of the advisors, are trading at prices that are below-average in relation to such measures as earnings and book value. These stocks often have above-average dividend yields. Typically, the Fund spreads its assets over a broadly diversified group of companies. 5 Stocks of publicly traded companies and funds that invest in stocks are often classified according to market value, or market capitalization. These classifications typically include small-cap, mid-cap, and large-cap. It's important to understand that, for both companies and stock funds, market capitalization ranges change over time. Also, interpretations of size vary, and there are no "official" definitions of small-, mid-, and large-cap, even among Vanguard fund advisors. The asset-weighted median market capitalization of the Fund as of October 31, 2004, was $xx.x billion. FLAG THE FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK PRICES OVERALL WILL DECLINE. STOCK MARKETS TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF FALLING PRICES. To illustrate the volatility of stock prices, the following table shows the best, worst, and average annual total returns for the U.S. stock market over various periods as measured by the Standard & Poor's 500 Index, a widely used barometer of market activity. (Total returns consist of dividend income plus change in market price.) Note that the returns shown do not include the costs of buying and selling stocks or other expenses that a real-world investment portfolio would incur. U.S. STOCK MARKET RETURNS (1926-2004) - ---------------------------------------------------------- 1 YEAR 5 YEARS 10 YEARS 20 YEARS - ---------------------------------------------------------- Best 54.2% 28.6% 19.9% 17.8% Worst -43.1 -12.4 -0.8 3.1 Average 12.4 10.7 11.2 11.3 - ---------------------------------------------------------- The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through 2004. You can see, for example, that while the average return on common stocks for all of the 5-year periods was 10.7%, average returns for individual 5-year periods ranged from -12.4% (from 1928 through 1932) to 28.6% (from 1995 through 1999). These average returns reflect past performance on common stocks; you should not regard them as an indication of future returns from either the stock market as a whole or the Fund in particular. ================================================================================ PLAIN TALK ABOUT GROWTH FUNDS AND VALUE FUNDS Growth investing and value investing are two styles employed by stock-fund managers. Growth funds generally focus on stocks of companies believed to have above-average potential for growth in revenue and earnings. These stocks typically have low dividend yields and above-average prices in relation to such measures as earnings and book value. Value funds typically emphasize stocks whose prices are below average in relation to those measures; these stocks often have above-average dividend yields. Growth and value stocks have historically produced similar long-term returns, though each category has periods when it outperforms the other. ================================================================================ FLAG THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE THAT RETURNS FROM LARGE- AND MID-CAPITALIZATION VALUE STOCKS WILL TRAIL RETURNS FROM THE OVERALL STOCK MARKET. HISTORICALLY, MID-CAP STOCKS HAVE BEEN MORE VOLATILE IN PRICE THAN THE LARGE-CAP STOCKS THAT DOMINATE THE OVERALL MARKET, AND THEY OFTEN PERFORM QUITE DIFFERENTLY. 6 SECURITY SELECTION The Fund uses multiple investment advisors, each of which independently chooses and maintains a portfolio of common stocks for the Fund. Each advisor is responsible for a portion of the Fund's assets. These advisors employ active investment management methods, which means that securities are bought and sold according to the advisors' evaluations about companies and their financial prospects and about the stock market and economy in general. Each advisor will sell a security when it is no longer as attractive as an alternative investment. While each advisor uses a different process to select securities, each is committed to investing in large- and mid-cap stocks that, in their opinion, are undervalued. Undervalued stocks are generally those that are out of favor with investors and, in the opinion of the advisors, are trading at prices that are below-average in relation to such measures as earnings and book value. These stocks often have above-average dividend yields. Barrow, Hanley, Mewhinney & Strauss, Inc. (Barrow, Hanley), which managed about xx% of the Fund's assets as of October 31, 2004, uses traditional methods of stock selection--research and analysis--to identify undervalued securities. A security will be sold when, in the advisor's opinion, its share price accurately reflects the security's overall worth. At that point, another undervalued security will be chosen. Barrow, Hanley looks for individual stocks that reflect these value characteristics: price/earnings and price/book below the market and price/dividend above the market. Equinox Capital Management, LLC (Equinox), which managed about xx% of the Fund's assets as of October 31, 2004, uses its own fundamental research and proprietary software to identify undervalued securities with attractive growth and dividend prospects. Equinox ranks securities based on a variety of factors such as cash flow, price-to-earnings ratio relative to historical levels and relative to the market, and earnings momentum. Hotchkis and Wiley Capital Management, LLC (Hotchkis & Wiley), which managed about xx% of the Fund's assets as of October 31, 2004, invests mainly in large-cap common stocks with value-oriented characteristics. The advisor follows a disciplined investment approach, focusing on such investment parameters as a company's tangible assets, sustainable cash flow, and potential for improving business performance. Tukman Capital Management, Inc. (Tukman), which managed about xx% of the Fund's assets as of October 31, 2004, uses traditional research methods to assess securities. Tukman focuses its research on stocks of financially sound companies and seeks to purchase them when they have reasonable price/earnings ratios. The Vanguard Group (Vanguard), which managed about x% of the Fund's assets as of October 31, 2004, constructs a portfolio of large- and mid-cap domestic value stocks based on its assessment of the stocks' relative return potential. The advisor selects stocks that it believes offer a good balance between reasonable valuations and attractive growth prospects relative to their peers. Vanguard implements its stock-selection process through the use of proprietary software programs that allow comparisons among thousands of securities. Vanguard manages a separate portion of the Fund's assets (about x% as of October 31, 2004, by investing in stock futures and/or shares of exchange-traded funds. For more details, see "Other Investment Policies and Risks." The Fund is generally managed without regard to tax ramifications. FLAG THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT POOR SECURITY SELECTION WILL CAUSE THE FUND TO UNDERPERFORM RELEVANT BENCHMARKS OR OTHER FUNDS WITH A SIMILAR INVESTMENT OBJECTIVE. 7 OTHER INVESTMENT POLICIES AND RISKS Besides investing in undervalued common stocks, the Fund may make other kinds of investments to achieve its objective. Although the Fund typically does not make significant investments in foreign securities, it reserves the right to invest up to 20% of its assets this way. Foreign securities may be traded on U.S. or foreign markets. To the extent that it owns foreign securities, the Fund is subject to (1) country risk, which is the chance that domestic events--such as political upheaval, financial troubles, or natural disasters--will weaken a country's securities markets; and (2) currency risk, which is the chance that the value of a foreign investment, measured in U.S. dollars, will decrease because of unfavorable changes in currency exchange rates. The Fund may invest in money market instruments, fixed income securities, convertible securities, and other equity securities, such as preferred stocks. The Fund may invest up to 15% of its net assets in restricted securities with limited marketability or in other illiquid securities. The Fund may invest, to a limited extent, in derivatives. Generally speaking, a derivative is a financial contract whose value is based on the value of a traditional security (such as a stock or bond), an asset (such as a commodity like gold), or a market index (such as the S&P 500 Index). The Fund will not use derivatives for speculation or for the purpose of leveraging (magnifying) investment returns. Vanguard typically invests a small portion of the Fund's assets in stock index futures and/or shares of exchange-traded funds, including VIPER/(R)/ Shares issued by Vanguard stock index funds. Stock index futures and ETFs provide returns similar to those of common stocks. The advisor may purchase them when doing so will reduce the Fund's transaction costs or add value because the instruments are favorably prices. Vanguard receives no additional revenue from investing Fund assets in VIPER Shares of other Vanguard funds. Fund assets invested in VIPER Shares are excluded when allocating to the Fund its share of the costs of Vanguard operations. CASH MANAGEMENT Vanguard may invest the Fund's daily cash balance in one or more Vanguard(R) CMT Funds, which are very low-cost money market funds. The Fund is permitted to invest in the CMT Funds under the terms of an exemption granted by the Securities and Exchange Commission (SEC). The Fund bears its proportionate share of the "at-cost" expenses of the Vanguard CMT Fund in which it invests. TEMPORARY INVESTMENT MEASURES The Fund may temporarily depart from its normal investment policies--for instance, by allocating substantial assets to cash investments--in response to extraordinary market, economic, political, or other conditions. In doing so, the Fund may succeed in avoiding losses, but may otherwise fail to achieve its investment objective. 8 FREQUENT TRADING OR MARKET-TIMING Some investors try to profit from strategies involving frequent trading of mutual fund shares, such as market-timing. As money is shifted in and out by a shareholder engaging in frequent trading, a fund incurs expenses for buying and selling securities, resulting in increased brokerage and administrative costs. These costs are borne by all fund shareholders, including the long-term investors who do not generate the costs. Frequent trading may also interfere with an advisor's ability to efficiently manage the fund. The Vanguard(R) funds do not accommodate frequent trading. The board of trustees of each Vanguard fund has adopted policies and procedures reasonably designed to detect and discourage frequent trading and, in some cases, to compensate the fund for the costs associated with it. Although there is no assurance that Vanguard will be able to detect or prevent frequent trading or market-timing in all circumstances, the following policies have been adopted to address these issues: - - Each Vanguard fund reserves the right to reject any purchase request--including exchanges from other Vanguard funds--without notice and regardless of size. A purchase request could be rejected if Vanguard determines that such purchase may disrupt a fund's operation or performance or because of a history of frequent trading by the investor. - - Each Vanguard fund (other than money market funds and VIPER/(R) /Shares) limits the number of times that an investor can exchange into and out of the fund. - - Certain Vanguard funds charge shareholders purchase and/or redemption fees on transactions. See the INVESTING WITH VANGUARD section of this prospectus for further details on Vanguard's transaction policies. Each fund (other than money market funds), in determining its net asset value, may use fair-value pricing as described in the SHARE PRICE section. When used, fair-value pricing may reduce or eliminate the profitability of certain frequent-trading strategies. DO NOT INVEST WITH VANGUARD IF YOU ARE A MARKET-TIMER. TURNOVER RATE Although the Fund normally seeks to invest for the long term, it may sell securities regardless of how long they have been held. The FINANCIAL HIGHLIGHTS section of this prospectus shows historical turnover rates for the Fund. A turnover rate of 100%, for example, would mean that the Fund had sold and replaced securities valued at 100% of its net assets within a one-year period. The average turnover rate for large-cap value funds was approximately 103%, as reported by Morningstar, Inc., on October 31, 2004. ================================================================================ PLAIN TALK ABOUT TURNOVER RATE Before investing in a mutual fund, you should review its turnover rate. This gives an indication of how transaction costs, which are not included in the fund's expense ratio, could affect the fund's future returns. In general, the greater the volume of buying and selling by the fund, the greater the impact that brokerage commissions and other transaction costs will have on its return. Also, funds with high turnover rates may be more likely to generate capital gains that must be distributed to shareholders as taxable income. ================================================================================ 9 THE FUND AND VANGUARD The Fund is a member of The Vanguard Group, a family of 36 investment companies with more than 130 funds holding assets in excess of $750 billion. All of the funds that are members of The Vanguard Group share in the expenses associated with administrative services and business operations, such as personnel, office space, equipment, and advertising. Vanguard also provides marketing services to the funds. Although shareholders do not pay sales commissions or 12b-1 distribution fees, each fund (or in the case of a fund with multiple share classes, each share class of the fund) pays its allocated share of The Vanguard Group's marketing costs. ================================================================================ PLAIN TALK ABOUT VANGUARD'S UNIQUE CORPORATE STRUCTURE The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by the funds it oversees and thus indirectly by the shareholders in those funds. Most other mutual funds are operated by for-profit management companies that may be owned by one person, by a group of individuals, or by investors who own the management company's stock. The management fees charged by these companies include a profit component over and above the companies' cost of providing services. By contrast, Vanguard provides services to its member funds on an "at-cost" basis, with no profit component, which helps to keep the funds' expenses low. ================================================================================ INVESTMENT ADVISORS The Fund uses a multimanager approach to investing its assets. Each advisor named below independently manages its assigned portion of the Fund's assets, subject to the supervision and oversight of Vanguard and the board of trustees. - - Barrow, Hanley, Mewhinney & Strauss, Inc., One McKinney Plaza, 3232 McKinney Avenue, 15th Floor, Dallas, TX 75204, is an investment advisory firm founded in 1979. As of October 31, 2004, the firm managed about $xx billion in assets. - - Equinox Capital Management, LLC, 590 Madision Avenue, 41st Floor, New York, NY 10022, is an investment advisory firm founded in 1989. As of October 31, 2004, Equinox managed about $xx billion in assets. - - Hotchkis and Wiley Capital Management, LLC, 725 South Figueroa Street, 39th Floor, Los Angeles, CA 90017, is an investment advisory firm founded in 1980. As of October 31, 2004, Hotchkis & Wiley managed about $xx billion in assets. - - Tukman Capital Management, Inc., 60 East Sir Francis Drake Boulevard, Larkspur, CA 94939, is an investment advisory firm founded in 1980. As of October 31, 2004, Tukman managed about $x billion in assets. - - The Vanguard Group, P.O. Box 2600, Valley Forge, PA 19482, which began operations in 1975, serves as advisor to the Fund through its Quantitative Equity Group. As of October 31, 2004, Vanguard's Quantitative Equity Group served as advisor for about $xxx billion in assets. 10 The Fund pays the following investment advisors--Barrow, Hanley; Equinox; Hotchkis & Wiley; and Tukman--on a quarterly basis. For each advisor, the quarterly fee is based on certain annual percentage rates applied to average month-end net assets managed by the advisor over the period. In addition, the quarterly fees paid to each advisor are increased or decreased based on the advisor's performance in comparison with that of a benchmark index. For these purposes, the cumulative total return of each advisor's portion of the Fund over a trailing 36-month period (a 60-month period in the case of Hotchkis & Wiley) is compared with that of the Standard & Poor's 500/Barra Value Index (for Barrow, Hanley), the Russell 1000 Value Index (for Equinox), the Morgan Stanley Capital International (MSCI) US Investable Market 2500 Index (for Hotchkis & Wiley), and the S&P 500 Index (for Tukman) over the same period. Vanguard provides advisory services to the Fund on an at-cost basis. Vanguard's performance is evaluated against the MSCI US Prime Market Value Index. Please consult the Fund's Statement of Additional Information for more information about the Fund's investment advisory arrangements. For the fiscal year ended October 31, 2004, the advisory fees and expenses represented an effective annual rate of 0.xx% of the Fund's average net assets before a performance- based increase of x.xx%. Each advisor, when trading securities on behalf of the Fund, must seek total costs or total proceeds that are the most favorable under the circumstances applicable to each transaction (best execution). The advisor selects broker-dealers based on its assessment of their ability to provide best execution. At the direction of the Fund's board of trustees, some portion of Fund transactions may be directed to a broker that has previously agreed to rebate a portion of the commissions it receives directly to the Fund, so long as the advisor reasonably believes that the broker can provide best execution. Under the terms of an SEC exemption, the Fund's board of trustees may, without prior approval from shareholders, change the terms of an advisory agreement or hire a new investment advisor--either as a replacement for an existing advisor or as an additional advisor. Any significant change in the Fund's advisory arrangements will be communicated to shareholders in writing. As the Fund's sponsor and overall manager, The Vanguard Group may provide additional investment advisory services to the Fund, on an at-cost basis, at any time. Vanguard may also recommend to the board of trustees that an advisor be hired, terminated, or replaced, or that the terms of an existing advisory agreement be revised. 11 ================================================================================ PLAIN TALK ABOUT THE FUND'S ADVISORS The managers primarily responsible for overseeing the Fund's investments are: JAMES P. BARROW, Founding Partner of Barrow, Hanley. He has managed investment portfolios since 1963; has been with Barrow, Hanley since 1979; and has managed the Fund since 1985. Education: B.S., University of South Carolina. RONALD J. ULRICH, Chairman, Chief Investment Officer, and Founder of Equinox. He has worked in investment management since 1973; has been with Equinox since 1989; and has managed the Fund since 1991. Education: B.S., Lehigh University; M.B.A., New York University. GEORGE H. DAVIS, JR., Chief Executive Officer and Portfolio Manager of Hotchkis & Wiley. He has worked in investment management since 1983; has been with Hotchkis & Wiley since 1988; and has managed the Fund since 2003. Education: B.A. and M.B.A., Stanford University. SHELDON J. LIEBERMAN, Principal and Portfolio Manager of Hotchkis & Wiley. He has worked in investment management since 1986; has been with Hotchkis & Wiley since 1994; and has managed the Fund since 2003. Education: B.A., University of California Los Angeles; M.B.A., California State University Northridge. MELVIN TUKMAN, President, Director, and Founder of Tukman. He has worked in investment management since 1971; has been with Tukman since 1980; and has managed the Fund since 1991. Education: A.B., Hunter College; M.B.A., Harvard Business School. DANIEL L. GROSSMAN, Vice President and Portfolio Manager of Tukman. He has worked in investment management since 1978; has been with Tukman since 1982; and has managed the Fund since 1991. Education: B.A., Yale University; M.B.A., Stanford University. GEORGE U. SAUTER, Managing Director and Chief Investment Officer of Vanguard. He has worked in investment management since 1985; has had primary responsibility for Vanguard's stock indexing and active quantitative investments and strategy since joining the company in 1987; and has managed the Fund since 1991. Education: A.B., Dartmouth College; M.B.A., University of Chicago. JOEL M. DICKSON, Principal of Vanguard. He has worked in investment management for Vanguard since 1996 and has managed the Fund since 2003. Education: A.B., Washington University in St. Louis; Ph.D., Stanford University. ================================================================================ DIVIDENDS, CAPITAL GAINS, AND TAXES FUND DISTRIBUTIONS The Fund distributes to shareholders virtually all of its net income (interest and dividends, less expenses) as well as any net capital gains realized from the sale of its holdings. Income dividends generally are distributed in June and December; capital gains distributions generally occur in December. You can receive distributions of income or capital gains in cash, or you can have them automatically reinvested in more shares of the Fund. 12 ================================================================================ PLAIN TALK ABOUT DISTRIBUTIONS As a shareholder, you are entitled to your portion of a fund's income from interest and dividends as well as gains from the sale of investments. Income consists of both the dividends that the fund earns from any stock holdings and the interest it receives from any money market and bond investments. Capital gains are realized whenever the fund sells securities for higher prices than it paid for them. These capital gains are either short-term or long-term, depending on whether the fund held the securities for one year or less or for more than one year. You receive the fund's earnings as either a dividend or capital gains distribution. ================================================================================ BASIC TAX POINTS Vanguard will send you a statement each year showing the tax status of all your distributions. In addition, investors in taxable accounts should be aware of the following basic tax points: - - Distributions are taxable to you for federal income tax purposes, whether or not you reinvest these amounts in additional Fund shares. - - Distributions declared in December--if paid to you by the end of January--are taxable for federal income tax purposes as if received in December. - - Any dividend and short-term capital gains distributions that you receive are taxable to you as ordinary income for federal income tax purposes. If you are an individual and meet certain holding-period requirements with respect to your Fund shares, you may be eligible for reduced federal tax rates on "qualified dividend income", if any, distributed by the Fund. - - Any distributions of net long-term capital gains are taxable to you as long-term capital gains for federal income tax purposes, no matter how long you've owned shares in the Fund. - - Capital gains distributions may vary considerably from year to year as a result of the Fund's normal investment activities and cash flows. - - A sale or exchange of Fund shares is a taxable event. This means that you may have a capital gain to report as income, or a capital loss to report as a deduction, when you complete your federal income tax return. - - Dividend and capital gains distributions that you receive, as well as your gains or losses from any sale or exchange of Fund shares, may be subject to state and local income taxes. - - Any conversion between classes of shares of the same fund is a nontaxable event. By contrast, an exchange between classes of shares of different funds is a taxable event. 13 ================================================================================ PLAIN TALK ABOUT "BUYING A DIVIDEND" Unless you are investing through a tax-deferred retirement account (such as an IRA), you should consider avoiding a purchase of fund shares shortly before the fund makes a distribution, because doing so can cost you money in taxes. This is known as "buying a dividend." For example: On December 15, you invest $5,000, buying 250 shares for $20 each. If the fund pays a distribution of $1 per share on December 16, its share price will drop to $19 (not counting market change). You still have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250 shares x $1 = $250 in distributions), but you owe tax on the $250 distribution you received--even if you reinvest it in more shares. To avoid "buying a dividend," check a fund's distribution schedule before you invest. ================================================================================ GENERAL INFORMATION BACKUP WITHHOLDING. By law, Vanguard must withhold 28% of any taxable distributions or redemptions from your account if you do not: - - Provide us with your correct taxpayer identification number; - - Certify that the taxpayer identification number is correct; and - - Confirm that you are not subject to backup withholding. Similarly, Vanguard must withhold taxes from your account if the IRS instructs us to do so. FOREIGN INVESTORS. Vanguard funds generally are not sold outside the United States, except to certain qualified investors. If you reside outside the United States, please consult our website at www.vanguard.com and review "Non-U.S. Investors." Foreign investors should be aware that U.S. withholding and estate taxes may apply to any investments in Vanguard funds. INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to your address of record is returned as undeliverable, Vanguard will automatically reinvest all future distributions until you provide us with a valid mailing address. TAX CONSEQUENCES. This prospectus provides general tax information only. If you are investing through a tax-deferred retirement account, such as an IRA, special tax rules apply. Please consult your tax advisor for detailed information about a fund's tax consequences for you. SHARE PRICE The Fund's share price, called its net asset value, or NAV, is calculated each business day as of the close of regular trading on the New York Stock Exchange, generally 4 p.m., Eastern time. NAV per share is computed by dividing the net assets allocated to each share class by the number of Fund shares outstanding for that class. On holidays or other days when the Exchange is closed, the NAV is not calculated, and the Fund does not transact purchase or redemption requests. However, on those days the value of the Fund's assets may be affected to the extent that the Fund holds foreign securities that trade on foreign markets that are open. Stocks held by a Vanguard fund are valued at their market value when reliable market quotations are readily available. Certain short-term debt instruments used to manage a fund's cash are valued on the basis of amortized cost. The values of any foreign securities held by a fund are converted into U.S. dollars using an exchange rate obtained from an independent third party. 14 When reliable market quotations are not readily available, securities are priced at their fair value, which is the price a security's owner might reasonably expect to receive upon its sale. A fund also may use fair-value pricing if the value of a security it holds has been materially affected by events occurring before the fund's pricing time but after the close of the primary markets or exchanges on which the security is traded. This most commonly occurs with foreign securities, which may trade on foreign exchanges that close many hours before the fund's pricing time. Intervening events might be company-specific (e.g., earnings report, merger announcement); country-specific (e.g., natural disaster, economic or political news, act of terrorism, interest rate change); or global. Intervening events include price movements in U.S. markets that are deemed to affect the value of foreign securities. Although rare, fair-value pricing also may be used for domestic securities--for example, if (1) trading in a security is halted and does not resume before the fund's pricing time or if a security does not trade in the course of a day, and (2) the fund holds enough of the security that its price could affect the fund's NAV. Fair-value prices are determined by Vanguard according to procedures adopted by the board of trustees. When fair-value pricing is employed, the prices of securities used by a fund to calculate its NAV may differ from quoted or published prices for the same securities. Vanguard fund share prices can be found daily in the mutual fund listings of most major newspapers under various "Vanguard" headings. FINANCIAL HIGHLIGHTS The following financial highlights tables are intended to help you understand the Fund's financial performance for the periods shown, and certain information reflects financial results for a single Fund share. The total returns in each table represent the rate that an investor would have earned or lost each period on an investment in the Fund (assuming reinvestment of all distributions). This information has been derived from the financial statements audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, whose report--along with the Fund's financial statements--is included in the Fund's most recent annual report to shareholders. To receive a free copy of the latest annual or semiannual report, you may access a report online at www.vanguard.com or you may contact Vanguard by telephone or by mail. 15 ================================================================================ PLAIN TALK ABOUT HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE This explanation uses the Fund's Investor Shares as an example. The Investor Shares began fiscal year 2004 with a net asset value (price) of $xx.xx per share. During the year, each Investor Share earned $x.xx from investment income (interest and dividends) and $x.xx from investments that had appreciated in value or that were sold for higher prices than the Fund paid for them. Shareholders received $x.xx per share in the form of dividend distributions. A portion of each year's distributions may come from the prior year's income or capital gains. The share price at the end of the year was $xx.xx, reflecting earnings of $x.xx per share and distributions of $x.xx per share. This was an increase of $x.xx per share (from $xx.xx at the beginning of the year to $xx.xx at the end of the year). For a shareholder who reinvested the distributions in the purchase of more shares, the total return was xx.xx% for the year. As of October 31, 2004, the Investor Shares had approximately $xx.x billion in net assets. For the year, the expense ratio was 0.xx% ($x.x0 per $1,000 of net assets), and the net investment income amounted to x.xx% of average net assets. The Fund sold and replaced securities valued at xx% of its net assets. ================================================================================
WINDSOR II FUND INVESTOR SHARES - ----------------------------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, ------------------------------------------------- 2004 2003 2002 2001 2000 - ----------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $24.61 $20.87 $24.50 $27.58 $29.03 - ----------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income xxx .51 .51 .564 .64 Net Realized and Unrealized Gain (Loss) on Investments xxx 3.75 (3.47) (1.819) 1.08 - ----------------------------------------------------------------------------------------------- Total from Investment Operations xxx 4.26 (2.96) (1.255) 1.72 - ----------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income xxx (.52) (.52) (.585) (.67) Distributions from Realized Capital Gains xxx -- (.15) (1.240) (2.50) - ----------------------------------------------------------------------------------------------- Total Distributions xxx (.52) (.67) (1.825) (3.17) - ----------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $xxx $24.61 $20.87 $24.50 $27.58 - ----------------------------------------------------------------------------------------------- TOTAL RETURN xxx% 20.68% -12.51% -4.89% 7.22% - ----------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $xxx $20,843 $17,735 $21,495 $24,070 Ratio of Total Expenses to Average Net Assets xxx% 0.43% 0.42% 0.40% 0.37% Ratio of Net Investment Income to Average Net Assets xxx% 2.31% 2.12% 2.10% 2.36% Turnover Rate xxx% 29% 41% 33% 26% - -----------------------------------------------------------------------------------------------
16
WINDSOR II FUND ADMIRAL SHARES - ------------------------------------------------------------------------------------------ YEAR ENDED OCTOBER 31, MAY 14* ----------------------------- TO OCT. 31, 2004 2003 2002 2001 - ------------------------------------------------------------------------------------------ NET ASSET VALUE, BEGINNING OF PERIOD $43.69 $37.05 $43.50 $50.00 - ------------------------------------------------------------------------------------------ INVESTMENT OPERATIONS Net Investment Income xxx .95 .944 .408 Net Realized and Unrealized Gain (Loss) on Investments xxx 6.65 (6.167) (6.433) - ------------------------------------------------------------------------------------------ Total from Investment Operations xxx 7.60 (5.223) (6.025) - ------------------------------------------------------------------------------------------ DISTRIBUTIONS Dividends from Net Investment Income xxx (.96) (.962) (.475) Distributions from Realized Capital Gains xxx -- (.265) -- - ------------------------------------------------------------------------------------------ Total Distributions xxx (.96) (1.227) (.475) - ------------------------------------------------------------------------------------------ NET ASSET VALUE, END OF PERIOD $xxx $43.69 $37.05 $43.50 - ------------------------------------------------------------------------------------------ TOTAL RETURN xxx% 20.79% -12.44% -12.16% - ------------------------------------------------------------------------------------------ RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $xxx $3,412 $2,484 $2,039 Ratio of Total Expenses to Average Net Assets xxx% 0.32% 0.35% 0.35%** Ratio of Net Investment Income to Average Net Assets xxx% 2.41% 2.18% 1.83%** Turnover Rate xxx% 29% 41% 33% - ------------------------------------------------------------------------------------------ *Inception. **Annualized.
17 - -------------------------------------------------------------------------------- INVESTING WITH VANGUARD This section of the prospectus explains the basics of doing business with Vanguard. Vanguard reserves the right to change these policies, without advance notice to shareholders. BUYING SHARES CONVERTING SHARES REDEEMING SHARES EXCHANGING SHARES OTHER RULES YOU SHOULD KNOW FUND AND ACCOUNT UPDATES CONTACTING VANGUARD - -------------------------------------------------------------------------------- BUYING SHARES ACCOUNT MINIMUMS FOR INVESTOR SHARES TO OPEN AND MAINTAIN AN ACCOUNT. $3,000 for regular accounts; $1,000 for IRAs (excluding SEP-IRAs) and most custodial accounts for minors. TO ADD TO AN EXISTING ACCOUNT. $50 by Automatic Investment Plan; $100 by check, exchange, or electronic bank transfer (other than Automatic Investment Plan); $1,000 by wire. Vanguard reserves the right to increase or decrease the minimum amount required to open or maintain an account, or to add to an existing account, without prior notice. ACCOUNT MINIMUMS FOR ADMIRAL SHARES TO OPEN AND MAINTAIN AN ACCOUNT. $250,000 for new investors; $150,000 or $50,000 for existing investors who are eligible to convert Investor Shares into Admiral Shares, depending on tenure in the fund. See Converting Shares. Institutional clients should contact Vanguard for information on special rules that may apply to them. See Converting Shares. TO ADD TO AN EXISTING ACCOUNT. $50 by Automatic Investment Plan; $100 by check, exchange, or electronic bank transfer (other than Automatic Investment Plan); $1,000 by wire. HOW TO BUY SHARES ONLINE TRANSACTIONS. On our website at www.vanguard.com you may open certain types of accounts, initiate electronic bank transfers, and exchange the proceeds of a redemption from one fund to a new or existing fund account. BY CHECK. To open an account, mail your check and a completed account registration form to Vanguard. When adding to an existing account, send your check with an Invest-by-Mail form detached from your last account statement. Make your check payable to: The Vanguard Group--"Fund number". For a list of the Fund numbers and addresses, see Contacting Vanguard. 18 BY EXCHANGE PURCHASE. You can purchase shares by telephone or mail with the proceeds of a redemption from another Vanguard fund. See Exchanging Shares and Other Rules You Should Know. BY WIRE. Call Vanguard to purchase shares by wire. See Contacting Vanguard. BY ELECTRONIC BANK TRANSFER. In order to perform electronic bank transfers, you must designate a bank account by completing a special form or the appropriate section of your account registration form. Then you can make purchases on a regular schedule (Automatic Investment Plan) or whenever you wish by electronic bank transfer. Your transaction can be accomplished online, by telephone, or by mail if your request is in good order. For further information about these options, consult our website at www.vanguard.com or see Contacting Vanguard. GOOD ORDER. You must include complete and accurate required information on your purchase request. See Other Rules You Should Know--Good Order. The requirements vary among types of accounts and transactions. YOUR PURCHASE PRICE BY CHECK (TO PURCHASE ALL FUNDS OTHER THAN MONEY MARKET FUNDS), BY EXCHANGE, OR BY WIRE. You buy shares at a fund's NAV determined as of your TRADE DATE. A purchase request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) receives a trade date of the same day, and a purchase request received after that time receives a trade date of the first business day following the date of receipt. BY CHECK (TO PURCHASE MONEY MARKET FUNDS ONLY). For a check purchase request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time), the trade date is the first business day following the date of receipt. For a purchase request received after that time, the trade date is the second business day following the date of receipt. Because money market instruments must be purchased with federal funds and it takes a money market mutual fund one business day to convert check proceeds into federal funds, the trade date is always one day later than for other funds. BY ELECTRONIC BANK TRANSFER (OTHER THAN AUTOMATIC INVESTMENT PLAN). For all Vanguard funds, a purchase request received by Vanguard on a business day before 10 p.m., Eastern time, will receive a trade date of the next business day. 19 BY ELECTRONIC BANK TRANSFER (WITH AUTOMATIC INVESTMENT PLAN). Your Vanguard account's trade date will be one business day before the date you designated for withdrawal from your bank account. For further information about these options, consult our website at www.vanguard.com or see Contacting Vanguard. PURCHASE RULES YOU SHOULD KNOW ^ADMIRAL SHARES. Please note that Admiral Shares are NOT available for: - - SIMPLE IRAs and 403(b)(7) custodial accounts; - - Other retirement plan accounts receiving special administrative services from Vanguard; or - - Accounts maintained by financial intermediaries, except in limited circumstances. ^CHECK PURCHASES. All purchase checks must be written in U.S. dollars and drawn on a U.S. bank. Vanguard does not accept cash, traveler's checks, or money orders. In addition, to protect the funds from fraud, Vanguard may refuse "starter checks" and checks made payable to third parties. ^NEW ACCOUNTS. We are required by law to obtain from you certain personal information that we will use to verify your identity. If you do not provide the information, we may not be able to open your account. If we are unable to verify your identity, Vanguard reserves the right to close your account or take such other steps as we deem reasonable. ^REJECTION OF PURCHASES. Vanguard reserves the right to reject any purchase request at any time and without notice. This includes the right to reject any purchase request because of a history of frequent trading by the investor, or that may disrupt a fund's operation or performance. Please call us before attempting to invest a large dollar amount. ^NO CANCELLATIONS. Place your transaction requests carefully. Vanguard will NOT cancel any transaction once it has been initiated and a confirmation number has been assigned (if applicable). ^FUTURE PURCHASES. All Vanguard funds reserve the right to stop selling shares or to reject specific purchase requests, including purchases by exchange from another Vanguard fund. These rights apply at any time, for any reason, and without notice. 20 CONVERTING SHARES A CONVERSION BETWEEN SHARE CLASSES OF THE SAME FUND IS A NONTAXABLE EVENT. PRICING OF SHARE CLASS CONVERSIONS If you convert from one class of shares to another, the transaction will be based on the respective share prices of the separate classes on the trade date for the conversion. Consequently, a conversion may provide you with fewer shares or more shares than you originally owned, depending on that day's share prices. At the time of conversion, the total value of your "old" shares will equal the total value of your "new" shares. However, subsequent share price fluctuations may decrease or increase the total value of your "new" shares as compared with that of your "old" shares. IMMEDIATE CONVERSIONS INTO ADMIRAL SHARES All shares purchased before the issuance of Admiral Shares are considered Investor Shares. You may convert Investor Shares into Admiral Shares at any time if your account balance in the Fund is at least $250,000. Registered users of Vanguard.com may request a conversion to Admiral Shares online, or you may contact Vanguard by telephone or mail to request this transaction. TENURE CONVERSIONS INTO ADMIRAL SHARES THREE-YEAR PRIVILEGE. After three years in the Fund, you may convert Investor Shares into Admiral Shares if your account balance in the Fund is at least $150,000 and you are registered with Vanguard.com. TEN-YEAR PRIVILEGE. After ten years in the Fund, you may convert Investor Shares into Admiral Shares if your account balance in the Fund is at least $50,000 and you are registered with Vanguard.com. Registered users of Vanguard.com may request a tenure conversion online, or you may contact Vanguard's Admiral Service Center by telephone or mail to request this transaction. MANDATORY CONVERSIONS INTO INVESTOR SHARES If an investor no longer meets the requirements for Admiral Shares, the Fund may convert the investor's Admiral Shares into Investor Shares. A decline in the investor's account balance because of market movement may result in such a conversion. The Fund will notify the investor in writing before any mandatory conversion into Investor Shares. 21 REDEEMING SHARES HOW TO REDEEM SHARES Be sure to check Other Rules You Should Know before initiating your request. ONLINE TRANSACTIONS. You may perform a redemption, initiate electronic bank transfers, and exchange the proceeds of a redemption from one fund to purchase shares of another fund through our website at www.vanguard.com. BY TELEPHONE. Contact Vanguard by telephone to request a redemption. For telephone numbers, see Contacting Vanguard. BY MAIL. Send your written redemption instructions in good order to Vanguard. For addresses, see Contacting Vanguard. BY ELECTRONIC BANK TRANSFER. In order to perform electronic bank transfers, you must designate a bank account by completing a special form or the appropriate section of your account registration form. Then you can make redemptions on a regular schedule (Automatic Withdrawal Plan) or whenever you wish by electronic bank transfer. Your transaction can be accomplished online, by telephone, or by mail if your request is in good order. For further information about these options, consult our website at www.vanguard.com or see Contacting Vanguard. GOOD ORDER. You must include complete and accurate required information on your redemption request. See Other Rules You Should Know--Good Order. The requirements vary among types of accounts and transactions. YOUR REDEMPTION PRICE You redeem shares at a fund's next-determined NAV after Vanguard receives your redemption request, including any special documentation required under the circumstances. As long as your request is received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time), your shares are redeemed at that day's NAV. This is known as your TRADE DATE. TYPES OF REDEMPTIONS ^BY CHECK. Unless instructed otherwise, Vanguard will mail you a check, normally within two business days of your trade date. ^BY EXCHANGE. You may instruct Vanguard to apply the proceeds of your redemption to purchase shares of another Vanguard fund. See Exchanging Shares and Other Rules You Should Know. ^BY AUTOMATIC WITHDRAWAL PLAN OR OTHER ELECTRONIC BANK TRANSFER. Proceeds of redeemed shares will be credited to your bank account two business days after your trade date. Minimum electronic redemption is $100. ^BY WIRE. When redeeming from a money market fund or a bond fund, you may instruct Vanguard to wire your redemption proceeds ($1,000 minimum) to a previously designated bank account. Wire redemptions generally are not available for 22 Vanguard's balanced or stock funds. The wire redemption option is not automatic; you must establish it either online or by completing a special form or the appropriate section of your account registration form. Vanguard charges a $5 fee for wire redemptions under $5,000. Money Market Funds: For telephone requests received by Vanguard by 10:45 a.m., Eastern time (2 p.m., Eastern time, for Vanguard(R) Prime Money Market Fund), the redemption proceeds will leave Vanguard by the close of business that same day. For other requests received before 4 p.m., Eastern time, the redemption proceeds will leave Vanguard by the close of business on the following business day. Bond Funds: For requests received by Vanguard by 4 p.m., Eastern time, the redemption proceeds will leave Vanguard by the close of business on the following business day. REDEMPTION RULES YOU SHOULD KNOW ^SPECIAL ACCOUNTS. Special documentation may be required to redeem from certain types of accounts, such as trust, corporate, nonprofit, or retirement accounts. Please call us before attempting to redeem from these types of accounts. ^POTENTIALLY DISRUPTIVE REDEMPTIONS. Vanguard reserves the right to pay all or part of your redemption in kind--that is, in the form of securities--if we reasonably believe that a cash redemption would disrupt the fund's operation or performance or that the shareholder may be engaged in frequent trading. Under these circumstances, Vanguard also reserves the right to delay payment of your redemption proceeds for up to seven calendar days. By calling us before you attempt to redeem a large dollar amount, you may avoid in-kind or delayed payment of your redemption. ^RECENTLY PURCHASED SHARES. Although you can redeem shares at any time, proceeds may not be made available to you until the Fund collects payment for your purchase. This may take up to ten calendar days for shares purchased by check or by electronic bank transfer. If you have written a check on a Fund with checkwriting privileges, that check may be rejected if the Fund does not have sufficient proceeds for payment. ^SHARE CERTIFICATES. If share certificates have been issued for your account, those shares cannot be redeemed until you return the certificates (unsigned) to Vanguard by registered mail. For the correct address, see Contacting Vanguard. ^ADDRESS CHANGE. If you change your address online or by telephone, there may be a 15-day hold on online and telephone redemptions. Address change confirmations are sent to both the old and new addresses. ^PAYMENT TO A DIFFERENT PERSON OR ADDRESS. At your request, we can make your redemption check payable to a different person or send it to a different address. However, this requires the written consent of all registered account 23 owners and may require a signature guarantee. You can obtain a signature guarantee from most commercial and savings banks, credit unions, trust companies, or member firms of a U.S. stock exchange. A notary public cannot provide a signature guarantee. ^NO CANCELLATIONS. Place your transaction requests carefully. Vanguard will NOT cancel any transaction once it has been initiated and a confirmation number has been assigned (if applicable). ^EMERGENCY CIRCUMSTANCES. Vanguard funds can postpone payment of redemption proceeds for up to seven calendar days. In addition, Vanguard funds can suspend redemptions and/or postpone payments of redemption proceeds beyond seven calendar days at times when the New York Stock Exchange is closed or during emergency circumstances, as determined by the U.S. Securities and Exchange Commission. EXCHANGING SHARES An exchange is the redemption of assets from one Vanguard fund that are used to purchase shares in another Vanguard fund. All open Vanguard funds accept exchange requests online (through your account registered with Vanguard.com), by telephone, or by mail. However, because excessive exchanges can disrupt management of a fund and increase the fund's costs for all shareholders, Vanguard places certain limits on the exchange privilege. For the U.S. STOCK INDEX FUNDS, 500 INDEX FUND, U.S. SECTOR INDEX FUNDS, INTERNATIONAL STOCK INDEX FUNDS, DEVELOPED MARKETS INDEX FUND, TOTAL INTERNATIONAL STOCK INDEX FUND, INSTITUTIONAL DEVELOPED MARKETS INDEX FUND, REIT INDEX FUND, BALANCED INDEX FUND, CALVERT SOCIAL INDEX FUND, INTERNATIONAL GROWTH FUND, INTERNATIONAL VALUE FUND, INTERNATIONAL EXPLORER(TM) FUND, or GROWTH AND INCOME FUND, you may request no more than two exchanges OUT of the fund online or by telephone within any 12-month period. Funds may be added to or deleted from this list at any time, without notice to shareholders. For ALL VANGUARD FUNDS, the following limit generally applies: - - No more than two substantive "round trips" through a non-money-market fund during any 12-month period. A "round trip" is an exchange redemption OUT of a fund (by any means) followed by an exchange purchase back INTO the same fund (by any means). "Substantive" means a 24 dollar amount that Vanguard determines, in its sole discretion, could adversely affect management of the fund. This limit does not apply to certain categories of transactions that Vanguard reasonably believes may not raise frequent- trading or market-timing concerns. These categories are: - - Systematic transactions, including those under Vanguard's Automatic Investment Plan, Automatic Exchange Service, Automatic Withdrawal Plan, and other rebalancing programs reviewed by Vanguard. - - Transactions within certain Vanguard advisory programs (such as Asset Management Services and Vanguard Fiduciary Services(R)). - - Transactions within certain retirement plans administered by Vanguard, for which other policies apply. This limit also will not apply if it would violate a law, regulation, or court order. This limit does not apply to omnibus accounts held through intermediaries. Please also see Other Rules You Should Know--Investing With Vanguard Through Other Firms regarding accounts held through intermediaries. Please note that Vanguard reserves the right to revise or terminate the exchange privilege, limit the amount of any exchange, or reject an exchange, at any time, for any reason. Also, in the event of a conflict between the exchange- privilege limitations of two funds, the stricter policy will apply to the transaction. OTHER RULES YOU SHOULD KNOW VANGUARD.COM(R) ^REGISTRATION. You can use your personal computer to review your account holdings, to buy, sell, or exchange shares of most Vanguard funds, and to perform most other transactions. To establish this service, you must register online. ^ELECTRONIC DELIVERY. Vanguard can deliver your account statements, transaction confirmations, and fund financial reports electronically. If you are a registered user of Vanguard.com, you can consent to the electronic delivery of these documents by logging on and changing your mailing preference under "My Profile". You can revoke your electronic consent at any time, and we will begin to send paper copies of these documents within 30 days of receiving your notice. TELEPHONE TRANSACTIONS ^AUTOMATIC. When we set up your account, we'll automatically enable you to do business with us by telephone, unless you instruct us otherwise in writing. 25 ^TELE-ACCOUNT(R). To conduct account transactions through Vanguard's automated telephone service, you must first obtain a Personal Identification Number (PIN). Call Tele-Account at 1-800-662-6273 to obtain a PIN, and allow seven days after requesting the PIN before using this service. ^PROOF OF A CALLER'S AUTHORITY. We reserve the right to refuse a telephone request if the caller is unable to provide the following information exactly as registered on the account: - - Authorization to act on the account (as the account owner or by legal documentation or other means). - - Account registration and address. - - Social Security or employer identification number. - - Fund name and account number, if applicable. ^SUBJECT TO REVISION. We reserve the right to revise or terminate Vanguard's telephone transaction service at any time, without notice. GOOD ORDER We reserve the right to reject any transaction instructions that are not in "good order." The requirements vary among types of accounts and transactions. Good order means that your instructions must include: - - The fund name and account number. - - The amount of the transaction (stated in dollars, shares, or percent). Written instructions also must include: - - Authorized signatures of all registered owners. - - Signature guarantees, if required for the type of transaction.* - - Any supporting legal documentation that may be required. *Call Vanguard for specific signature-guarantee requirements. FUTURE TRADE DATE REQUESTS Vanguard does not accept requests to hold a purchase, redemption or exchange transaction for a future date. All such requests will receive trade dates as previously described in Investing With Vanguard--Buying, Converting, Redeeming, and Exchanging Shares. ACCOUNTS WITH MORE THAN ONE OWNER If an account has more than one owner or authorized person, Vanguard will accept telephone or online instructions from any one owner or authorized person. RESPONSIBILITY FOR FRAUD Vanguard will not be responsible for any account losses because of fraud, so long as we reasonably believe that the person transacting business on an account is authorized to do so. Please take precautions to protect yourself from fraud. Keep your account information private and immediately review any account statements that we send to you. It is important that you contact Vanguard immediately about any transactions you believe to be unauthorized. 26 UNCASHED CHECKS Please cash your distribution or redemption checks promptly. Vanguard will not pay interest on uncashed checks. UNUSUAL CIRCUMSTANCES If you experience difficulty contacting Vanguard online, by telephone, or by Tele-Account, you can send us your transaction request by regular or express mail. See Contacting Vanguard for addresses. INVESTING WITH VANGUARD THROUGH OTHER FIRMS You may purchase or sell Investor Shares of most Vanguard funds through a financial intermediary, such as a bank, broker, or investment advisor. HOWEVER, ACCESS TO ADMIRAL SHARES THROUGH A FINANCIAL INTERMEDIARY IS RESTRICTED. PLEASE CONSULT YOUR FINANCIAL INTERMEDIARY TO DETERMINE WHETHER ADMIRAL SHARES ARE AVAILABLE THROUGH THAT FIRM. When intermediaries establish omnibus accounts in the Vanguard funds for their clients, we cannot monitor the individual clients' trading activity. However, we review trading activity at the omnibus account level, and we look for activity that may indicate potential frequent trading or market-timing. If we detect suspicious trading activity, we will seek the assistance of the intermediary to investigate that trading activity and take appropriate action, including prohibiting additional purchases of fund shares by a client. Intermediaries may apply frequent-trading policies that differ from those described in this prospectus. If you invest with Vanguard through an intermediary, please read that firm's program materials carefully to learn of any rules or fees that may apply. LOW-BALANCE ACCOUNTS All Vanguard funds reserve the right to liquidate any investment-only retirement-plan account or any nonretirement account whose balance falls below the minimum initial investment. If a fund has a redemption fee, that fee will apply to shares redeemed upon closure of the account. For most nonretirement accounts, Vanguard deducts a $10 fee in June if the fund account balance is below $2,500. This fee can be waived if your total Vanguard account assets are $50,000 or more. CUSTODIAL FEES Vanguard charges a custodial fee of $10 a year for each IRA fund account with a balance of less than $5,000. The fee can be waived if you have assets totaling $50,000 or more at Vanguard in any combination of accounts under your Social Security number, including IRAs, employer-sponsored retirement plans, brokerage accounts, annuities, and non-IRA accounts. 27 RIGHT TO CHANGE POLICIES In addition to the rights expressly stated elsewhere in this prospectus, Vanguard reserves the right to (1) alter, add, or discontinue any conditions of purchase, service, or privilege at any time without notice; (2) accept initial purchases by telephone; (3) freeze any account and suspend account services when Vanguard has received reasonable notice of a dispute between the registered or beneficial account owners or when we reasonably believe a fraudulent transaction may occur or has occurred; (4) alter, impose, discontinue, or waive any redemption, low-balance account, account maintenance, or other fees charged to a group of shareholders; and (5) redeem an account, without the owner's permission to do so, in cases of threatening conduct or suspicious, fraudulent, or illegal activity. Changes may affect all investors or only those in certain classes or groups. These actions will be taken when, in the sole discretion of Vanguard management, we reasonably believe they are deemed to be in the best interest of a fund. FUND AND ACCOUNT UPDATES CONFIRMATION STATEMENTS We will send a confirmation statement to verify your trade date and the amount of your transaction when you buy, sell, exchange, or convert shares. However, we will not send such statements if they reflect only money market checkwriting or the reinvestment of dividend or capital gains distributions. Promptly review each confirmation statement that we send to you. It is important that you contact Vanguard immediately with any questions you may have about any transaction reflected on the confirmation statement. PORTFOLIO SUMMARIES We will send quarterly portfolio summaries to help you keep track of your accounts throughout the year. Each summary shows the market value of your account at the close of the statement period, as well as all distributions, purchases, redemptions, exchanges, transfers, and conversions for the current calendar year. Promptly review each summary that we send to you. It is important that you contact Vanguard immediately with any questions you may have about any transaction reflected on the summary. TAX STATEMENTS We will send annual tax statements to assist you in preparing your income tax returns. These statements, which are generally mailed in January, will report the previous year's dividend and capital gains distributions, proceeds from the sale of shares, and distributions from IRAs and other retirement plans. 28 AVERAGE-COST REVIEW STATEMENTS For most taxable accounts, average-cost review statements will accompany annual 1099B tax statements. These statements show the average cost of shares that you redeemed during the previous calendar year, using the average-cost single-category method, which is one of the methods established by the IRS. ANNUAL AND SEMIANNUAL REPORTS We will send you (electronically or by mail, as you prefer) financial reports about Vanguard Windsor II Fund twice a year, in June and December. These comprehensive reports include overviews of the financial markets and provide the following specific Fund information: - - Performance assessments wit hcomparisons to industry benchmarks. - - Reports from the advisors. - - Financial statements with detailed listings of the Fund's holdings. Vanguard attempts to eliminate the unnecessary expense of duplicate mailings by sending just one report when two or more shareholders have the same last name and address. You may request individual reports by contacting our Client Services Department in writing, by telephone, or by e-mail. PORTFOLIO HOLDINGS We generally post on our website at www.vanguard.com a detailed list of the securities held in the Fund (portfolio holdings) as of the most recent calendar- quarter end in the "Holdings" section of the Fund's Profile page, 30 days after the end of the calendar quarter. Vanguard may exclude any portion of these portfolio holdings from publication when deemed in the best interest of the Fund. We generally post on our website at www.vanguard.com the ten largest stock portfolio holdings of the Fund, and the percentage that each of these holdings represents of the Fund's total assets, as of the most recent calendar-quarter end in the "Holdings" section of the Fund's Profile page, 15 calendar days after the end of the calendar quarter. Please consult the Fund's Statement of Additional Information or our website for a description of the policies and procedures that govern disclosure of the Fund's portfolio holdings. CONTACTING VANGUARD ONLINE VANGUARD.COM - - For the most complete source of Vanguard news - - For fund, account, and service information - - For most account transactions - - For literature requests - - 24 hours a day, 7 days a week 29 VANGUARD TELE-ACCOUNT(R) 1-800-662-6273 (ON-BOARD) - - For automated fund and account information - - For redemptions by check, exchange (subject to certain limitations), or wire - - Toll-free, 24 hours a day, 7 days a week INVESTOR INFORMATION 1-800-662-7447 (SHIP) (Text telephone at 1-800-952-3335) - - For fund and service information - - For literature requests - - Business hours only CLIENT SERVICES 1-800-662-2739 (CREW) (Text telephone at 1-800-749-7273) - - For account information - - For most account transactions - - Business hours only ADMIRAL SERVICE CENTER 1-888-237-9949 - - For Admiral account information - - For most Admiral transactions - - Business hours only INSTITUTIONAL DIVISION 1-888-809-8102 - - For information and services for large institutional investors - - Business hours only INTERMEDIARY SALES SUPPORT 1-800-997-2798 - - For information and services for financial intermediaries including broker- dealers, trust institutions, insurance companies, and financial advisors - - Business hours only VANGUARD ADDRESSES Please be sure to use the correct address, depending on your method of delivery. Use of an incorrect address could delay the processing of your transaction. REGULAR MAIL (INDIVIDUALS): The Vanguard Group P.O. Box 1110 Valley Forge, PA 19482-1110 REGULAR MAIL (INSTITUTIONS): The Vanguard Group P.O. Box 2900 Valley Forge, PA 19482-2900 REGISTERED, EXPRESS, OR OVERNIGHT MAIL: The Vanguard Group 455 Devon Park Drive Wayne, PA 19087-1815 30 FUND NUMBERS Please use the specific fund number when contacting us about Vanguard Windsor II Fund--73 (Investor Shares) or 573 (Admiral Shares). The Vanguard Group, Vanguard, Vanguard.com, Plain Talk, Admiral, Vanguard Tele-Account, Tele-Account, Explorer, VIPER, Vanguard Fiduciary Services, and the ship logo are trademarks of The Vanguard Group, Inc. Calvert Social Index is a trademark of Calvert Group, Ltd., and has been licensed for use by The Vanguard Group, Inc. Vanguard Calvert Social Index Fund is not sponsored, endorsed, sold, or promoted by Calvert Group, Ltd., and Calvert Group, Ltd., makes no representation regarding the advisability of investing in the fund. All other marks are the exclusive property of their respective owners. (THIS PAGE INTENTIONALLY LEFT BLANK.) (THIS PAGE INTENTIONALLY LEFT BLANK.) GLOSSARY OF INVESTMENT TERMS CAPITAL GAINS DISTRIBUTION Payment to mutual fund shareholders of gains realized on securities that a fund has sold at a profit, minus any realized losses. CASH INVESTMENTS Cash deposits, short-term bank deposits, and money market instruments that include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase agreements, commercial paper, and banker's acceptances. COMMON STOCK A security representing ownership rights in a corporation. A stockholder is entitled to share in the company's profits, some of which may be paid out as dividends. DIVIDEND DISTRIBUTION Payment to mutual fund shareholders of income from interest or dividends generated by a fund's investments. EXPENSE RATIO The percentage of a fund's average net assets used to pay its expenses during a fiscal year. The expense ratio includes management fees, administrative fees, and any 12b-1 distribution fees. It does not include the transaction costs of buying and selling portfolio securities. GROWTH FUND A mutual fund that emphasizes stocks of companies believed to have above-average prospects for growth in revenue and earnings. These stocks typically have low dividend yields and above-average prices in relation to such measures as earnings and book value. INVESTMENT ADVISOR An organization that makes the day-to-day decisions regarding a fund's investments. MEDIAN MARKET CAP An indicator of the size of companies in which a fund invests; the midpoint of market capitalization (market price x shares outstanding) of a fund's stocks, weighted by the proportion of the fund's assets invested in each stock. Stocks representing half of the fund's assets have market capitalizations above the median, and the rest are below it. MUTUAL FUND An investment company that pools the money of many people and invests it in a variety of securities in an effort to achieve a specific objective over time. NET ASSET VALUE (NAV) The market value of a mutual fund's total assets, minus liabilities, divided by the number of shares outstanding. The value of a single share is also called its share value or share price. PRICE/EARNINGS (P/E) RATIO The current share price of a stock, divided by its per-share earnings (profits). A stock selling for $20, with earnings of $2 per share, has a price/earnings ratio of 10. PRINCIPAL The face value of a debt instrument or the amount of money put into an investment. SECURITIES Stocks, bonds, money market instruments, and other investment vehicles. TOTAL RETURN A percentage change, over a specified time period, in a mutual fund's net asset value, assuming the reinvestment of all distributions of dividends and capital gains. VALUE FUND A mutual fund that emphasizes stocks whose prices typically are below-average in relation to such measures as earnings and book value. These stocks often have above-average dividend yields. VOLATILITY The fluctuations in value of a mutual fund or other security. The greater a fund's volatility, the wider the fluctuations in its returns. YIELD Income (interest or dividends) earned by an investment, expressed as a percentage of the investment's price. {SHIP GRAPHIC} THE VANGUARD GROUP (R) Post Office Box 2600 Valley Forge, PA 19482-2600 FOR MORE INFORMATION If you would like more information about Vanguard Windsor II Fund, the following documents are available free upon request: ANNUAL/SEMIANNUAL REPORTS TO SHAREHOLDERS Additional information about the Fund's investments is available in the Fund's annual and semiannual reports to shareholders. In the annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Fund's performance during its last fiscal year. STATEMENT OF ADDITIONAL INFORMATION (SAI) The SAI provides more detailed information about the Fund. The current annual and semiannual reports and the SAI are incorporated by reference into (and are thus legally a part of) this prospectus. To receive a free copy of the latest annual or semiannual report or the SAI, or to request additional information about the Fund or other Vanguard funds, please contact us as follows: THE VANGUARD GROUP INVESTOR INFORMATION DEPARTMENT P.O. BOX 2600 VALLEY FORGE, PA 19482-2600 TELEPHONE: 1-800-662-7447 (SHIP) TEXT TELEPHONE: 1-800-952-3335 WORLD WIDE WEB: WWW.VANGUARD.COM If you are a current Vanguard shareholder and would like information about your account, account transactions, and/or account statements, please call: CLIENT SERVICES DEPARTMENT TELEPHONE: 1-800-662-2739 (CREW) TEXT TELEPHONE: 1-800-749-7273 INFORMATION PROVIDED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC) You can review and copy information about the Fund (including the SAI) at the SEC's Public Reference Room in Washington, DC. To find out more about this public service, call the SEC at 1-202-942-8090. Reports and other information about the Fund are also available in the EDGAR Database on the SEC's Internet site at http://www.sec.gov, or you can receive copies of this information, for a fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the Public Reference Section, Securities and Exchange Commission, Washington, DC 20549-0102. Fund's Investment Company Act file number: 811-834 (C) 2005 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. P073 022005 PART B VANGUARD(R) WINDSOR FUNDS STATEMENT OF ADDITIONAL INFORMATION FEBRUARY 18 , 2005 This Statement is not a prospectus but should be read in conjunction with the Funds' current prospectuses (dated February 18 , 2005). To obtain, without charge, a prospectus or the most recent Annual Report to Shareholders, which contains the Funds' financial statements as hereby incorporated by reference, please call: INVESTOR INFORMATION DEPARTMENT: 1-800-662-7447 TABLE OF CONTENTS DESCRIPTION OF THE TRUST..............................................B-1 INVESTMENT POLICIES...................................................B-3 INVESTMENT LIMITATIONS................................................B-17 SHARE PRICE...........................................................B-18 PURCHASE AND REDEMPTION OF SHARES.....................................B-18 MANAGEMENT OF THE FUNDS ..............................................B-19 INVESTMENT ADVISORY SERVICES..........................................B-26 PORTFOLIO TRANSACTIONS................................................B-40 PROXY VOTING GUIDELINES ..............................................B-41 YIELD AND TOTAL RETURNS...............................................B-45 FINANCIAL STATEMENTS..................................................B-46 DESCRIPTION OF THE TRUST Vanguard Windsor Funds (the Trust) was organized as Wellington Equity Fund, Inc., a Delaware corporation, in 1958. It was reorganized as a Maryland corporation in 1973 and subsequently was reorganized as a Pennsylvania business trust in 1985. The Trust then was reorganized as a Maryland corporation later in 1985 and, finally, was reorganized as a Delaware statutory trust in May 1998. Prior to its reorganization as a Delaware statutory trust, the Trust was known as Vanguard/Windsor Funds, Inc. The Trust is registered with the United States Securities and Exchange Commission (SEC) under the Investment Company Act of 1940 (the 1940 Act) as an open-end, diversified management investment company. The Trust currently offers the following funds (and classes thereof): SHARE CLASSES** FUND* INVESTOR ADMIRAL Vanguard(R) Windsor(TM) Fund Yes Yes Vanguard(R) Windsor II(TM) Fund Yes Yes *Individually, a Fund; collectively, the Funds **Individually, a class; collectively, the classes Each Trust has the ability to offer additional funds, which in turn may issue classes of shares. There is no limit on the number of full and fractional shares that may be issued for a single fund or class of shares. B-1 Each Fund described in this Statement of Additional Information is a member fund. There are two types of "Vanguard funds", member funds and non-member funds. Member funds jointly own The Vanguard Group, Inc. (Vanguard), contribute to Vanguard's capital, and receive services at cost from Vanguard pursuant to a Funds' Service Agreement. Non-member funds do not contribute to Vanguard's capital, but they do receive services pursuant to special services agreements. See "Management of the Funds" for more information. SERVICE PROVIDERS CUSTODIAN. Citibank, N.A., 111 Wall Street, New York, NY 10005, serves as the Funds' custodian. The custodian is responsible for maintaining the Funds' assets, keeping all necessary accounts and records of Fund assets, and appointing any foreign sub-custodians or foreign securities depositories. INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM. PricewaterhouseCoopers LLP, Two Commerce Square, Suite 1700, 2001 Market Street, Philadelphia, PA, 19103-7042, serves as the Funds' independent accountants. The independent registered public accounting firm audits the Funds' annual financial statements and provides other related services. TRANSFER AND DIVIDEND-PAYING AGENT. The Funds' transfer agent and dividend-paying agent is Vanguard, 100 Vanguard Boulevard, Malvern, PA 19355. CHARACTERISTICS OF THE FUNDS' SHARES RESTRICTIONS ON HOLDING OR DISPOSING OF SHARES. There are no restrictions on the right of shareholders to retain or dispose of the Funds' shares, other than the possible future termination of a Fund or share class. Each Fund or class may be terminated by reorganization into another mutual fund or class or by liquidation and distribution of the assets of the Fund or class. Unless terminated by reorganization or liquidation, each Fund and share class will continue indefinitely. SHAREHOLDER LIABILITY. The Trust is organized under Delaware law, which provides that shareholders of a statutory trust are entitled to the same limitations of personal liability as shareholders of a corporation organized under Delaware law. Effectively, this means that a shareholder of a Fund will not be personally liable for payment of the Fund's debts except by reason of his or her own conduct or acts. In addition, a shareholder could incur a financial loss as a result of a Fund obligation only if the Fund itself had no remaining assets with which to meet such obligation. We believe that the possibility of such a situation arising is extremely remote. DIVIDEND RIGHTS. The shareholders of a Fund are entitled to receive any dividends or other distributions declared by the Fund. No shares of a Fund have priority or preference over any other shares of the Fund with respect to distributions. Distributions will be made from the assets of the Fund and will be paid ratably to all shareholders of the Fund (or class) according to the number of shares of the Fund (or class) held by shareholders on the record date. The amount of dividends per share may vary between separate share classes of the Fund based upon differences in the way that expenses are allocated between share classes pursuant to a multiple class plan. VOTING RIGHTS. Shareholders are entitled to vote on a matter if: (1) a shareholder vote is required under the 1940 Act; (2) the matter concerns an amendment to the Declaration of Trust that would adversely affect to a material degree the rights and preferences of the shares of a Fund or any class; (3) the trustees determine that it is necessary or desirable to obtain a shareholder vote; or (4) in the case of certain types of mergers or consolidations, share conversions, share exchanges, or sale of assets. The 1940 Act requires a shareholder vote under various circumstances, including to elect or remove trustees upon the written request of shareholders representing 10% or more of a Fund's net assets and to change any fundamental policy of a Fund. Unless otherwise required by applicable law, shareholders of a Fund receive one vote for each dollar of net asset value owned on the record date, and a fractional vote for each fractional dollar of net asset value owned on the record date. However, only the shares of the Fund or class affected by a particular matter are entitled to vote on that matter. In addition, each class has exclusive voting rights on any matter submitted to shareholders that relates solely to that class, and each class has separate voting rights on any matter submitted to shareholders in which the interests of one class differ from the interests of another. Voting rights are noncumulative and cannot be modified without a majority vote. B-2 LIQUIDATION RIGHTS. In the event that a Fund is liquidated, shareholders will be entitled to receive a pro rata share of the Fund's net assets. In the event that a class of shares is liquidated, shareholders of that class will be entitled to receive a pro rata share of the Fund's net assets that are allocated to that class. Shareholders may receive cash, securities, or a combination of the two. PREEMPTIVE RIGHTS. There are no preemptive rights associated with the Funds' shares. CONVERSION RIGHTS. Fund shareholders may convert their shares into another class of shares of the same Fund upon the satisfaction of any then applicable eligibility requirements. REDEMPTION PROVISIONS. Each Fund's redemption provisions are described in its current prospectus and elsewhere in this Statement of Additional Information. SINKING FUND PROVISIONS. The Funds have no sinking fund provisions. CALLS OR ASSESSMENT. The Funds' shares, when issued, are fully paid and non-assessable. TAX STATUS OF THE FUNDS Each Fund intends to continue to qualify as a "regulated investment company" under Subchapter M of the Internal Revenue Code of 1986, as amended. This special tax status means that the Fund will not be liable for federal tax on income and capital gains distributed to shareholders. In order to preserve its tax status, each Fund must comply with certain requirements. If a Fund fails to meet these requirements in any taxable year, it will be subject to tax on its taxable income at corporate rates, and all distributions from earnings and profits, including any distributions of net tax-exempt income and net long-term capital gains, will be taxable to shareholders as ordinary income. In addition, a Fund could be required to recognize unrealized gains, pay substantial taxes and interest, and make substantial distributions before regaining its tax status as a regulated investment company. Dividends received and distributed by each Fund on shares of stock of domestic corporations may be eligible for the dividends-received deduction applicable to corporate shareholders. Corporations must satisfy certain requirements in order to claim the deduction. Capital gains distributed by the Funds are not eligible for the dividends-received deduction. INVESTMENT POLICIES Some of the investment policies described below and in each Fund's prospectus set forth percentage limitations on a Fund's investment in, or holdings of, certain securities or other assets. Unless otherwise required by law, compliance with these policies will be determined immediately after the acquisition of such securities or assets. Subsequent changes in values, net assets, or other circumstances will not be considered when determining whether the investment complies with the Fund's investment policies and limitations. The following policies and explanations supplement each Fund's investment objective and policies set forth in the prospectus. With respect to the different investments discussed below, a Fund may acquire such investments to the extent consistent with its investment objective and policies. BORROWING. A fund's ability to borrow money is limited by its investment policies and limitations, by the 1940 Act, and by applicable exemptions, no-action letters, interpretations, and other pronouncements by the SEC and its staff, and any other regulatory authority having jurisdiction, from time to time. Under the 1940 Act, a fund is required to maintain continuous asset coverage (that is, total assets including borrowings, less liabilities exclusive of borrowings) of 300% of the amount borrowed, with an exception for borrowings not in excess of 5% of the fund's total assets made for temporary or emergency purposes. Any borrowings for temporary purposes in excess of 5% of the fund's total assets must maintain continuous asset coverage. If the 300% asset coverage should decline as a result of market fluctuations or for other reasons, a fund may be required to sell some of its portfolio holdings within three days (excluding Sundays and holidays) to reduce the debt and restore the 300% asset coverage, even though it may be disadvantageous from an investment standpoint to sell securities at that time. Borrowing will tend to exaggerate the effect on net asset value of any increase or decrease in the market value of a fund's portfolio. Money borrowed will be subject to interest costs which may or may not be recovered by earnings on the securities purchased. A fund also may be required to maintain minimum average balances in connection with a borrowing or to pay a commitment or other fee to maintain a line of credit; either of these requirements would increase the cost of borrowing over the stated interest rate. B-3 The SEC takes the position that other transactions that have a leveraging effect on the capital structure of a fund or are economically equivalent to borrowing can be viewed as constituting a form of borrowing by the fund for purposes of the 1940 Act. These transactions can include entering into reverse repurchase agreements, engaging in mortgage-dollar-roll transactions, selling securities short (other than short sales "against-the-box"), buying and selling certain derivatives (such as futures contracts), selling (or writing) put and call options, engaging in sale-buybacks, entering into firm-commitment and standby-commitment agreements, engaging in when-issued, delayed-delivery, or forward-commitment transactions, and other trading practices that have a leveraging effect on the capital structure of a fund or are economically equivalent to borrowing (additional discussion about a number of these transactions can be found below). A borrowing transaction will not be considered to constitute the issuance of a "senior security" by a fund, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund (1) maintains an offsetting financial position, (2) segregates liquid assets (with such liquidity determined by the advisor in accordance with procedures established by the board of trustees) equal (as determined on a daily mark-to-market basis) in value to the fund's potential economic exposure under the borrowing transaction, or (3) otherwise "covers" the transaction in accordance with applicable SEC guidance (collectively, "covers" the transaction). A fund may have to buy or sell a security at a disadvantageous time or price in order to cover a borrowing transaction or segregate sufficient liquid assets. In addition, assets so segregated may not be available to satisfy redemptions or for other purposes. COMMON STOCK. Common stock represents an equity or ownership interest in an issuer. Common stock typically entitles the owner to vote on the election of directors and other important matters as well as to receive dividends on such stock. In the event an issuer is liquidated or declares bankruptcy, the claims of owners of bonds, other debt holders, and owners of preferred stock take precedence over the claims of those who own common stock. CONVERTIBLE SECURITIES. Convertible securities are hybrid securities that combine the investment characteristics of bonds and common stocks. Convertible securities typically consist of debt securities or preferred stock that may be converted (on a voluntary or mandatory basis) within a specified period of time (normally for the entire life of the security) into a certain amount of common stock or other equity security of the same or a different issuer at a predetermined price. Convertible securities also include debt securities with warrants or common stock attached and derivatives combining the features of debt securities and equity securities. Other convertible securities with features and risks not specifically referred to herein may become available in the future. Convertible securities involve risks similar to those of both fixed income and equity securities. The market value of a convertible security is a function of its "investment value" and its "conversion value." A security's "investment value" represents the value of the security without its conversion feature (i.e., a nonconvertible fixed income security). The investment value may be determined by reference to its credit quality and the current value of its yield to maturity or probable call date. At any given time, investment value is dependent upon such factors as the general level of interest rates, the yield of similar nonconvertible securities, the financial strength of the issuer, and the seniority of the security in the issuer's capital structure. A security's "conversion value" is determined by multiplying the number of shares the holder is entitled to receive upon conversion or exchange by the current price of the underlying security. If the conversion value of a convertible security is significantly below its investment value, the convertible security will trade like nonconvertible debt or preferred stock and its market value will not be influenced greatly by fluctuations in the market price of the underlying security. In that circumstance, the convertible security takes on the characteristics of a bond, and its price moves in the opposite direction from interest rates. Conversely, if the conversion value of a convertible security is near or above its investment value, the market value of the convertible security will be more heavily influenced by fluctuations in the market price of the underlying security. In that case, the convertible security's price may be as volatile as that of common stock. Because both interest rate and market movements can influence its value, a convertible security generally is not as sensitive to interest rates as a similar fixed income security, nor is it as sensitive to changes in share price as its underlying equity security. Convertible securities are often rated below investment-grade or are not rated, and are generally subject to a high degree of credit risk. While all markets are prone to change over time, the generally high rate at which convertible securities are retired (through mandatory or scheduled conversions by issuers or voluntary redemptions by holders) and replaced with newly issued convertibles may cause the convertible securities market to change more rapidly than other markets. For example, a concentration of available convertible securities in a few economic sectors could elevate the sensitivity of the convertible securities market to the volatility of the equity markets and to the specific risks of those sectors. Moreover, convertible securities with innovative structures, such as mandatory conversion securities and equity-linked securities, have increased the sensitivity of the convertible securities market to the volatility of the equity markets and to the B-4 special risks of those innovations, which may include risks different from, and possibly greater than, those associated with traditional convertible securities. DEBT SECURITIES. A debt security is a security consisting of a certificate or other evidence of a debt (secured or unsecured) on which the issuing company or governmental body promises to pay the holder thereof a fixed, variable, or floating rate of interest for a specified length of time, and to repay the debt on the specified maturity date. Some debt securities, such as zero coupon bonds, do not make regular interest payments but are issued at a discount to their principal or maturity value. Debt securities include a variety of fixed income obligations, including, but not limited to, corporate bonds, government securities, municipal securities, convertible securities, mortgage-backed securities, and asset-backed securities. Debt securities include investment-grade securities, non-investment-grade securities, and unrated securities. Debt securities are subject to a variety of risks, such as interest rate risk, income risk, call/ prepayment risk, inflation risk, credit risk, and (in the case of foreign securities) country risk and currency risk. DEBT SECURITIES -- NON-INVESTMENT-GRADE SECURITIES. Non-investment-grade securities, also referred to as "high yield securities" or "junk bonds," are debt securities that are rated lower than the four highest rating categories by a nationally recognized statistical rating organization (for example, lower than Baa3 by Moody's Investors Service, Inc. or lower than BBB- by Standard & Poor's) or are determined to be of comparable quality by the fund's advisor. These securities are generally considered to be, on balance, predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation and will generally involve more credit risk than securities in the investment-grade categories. Investment in these securities generally provides greater income and increased opportunity for capital appreciation than investments in higher quality securities, but they also typically entail greater price volatility and principal and income risk. Analysis of the creditworthiness of issuers of high yield securities may be more complex than for issuers of investment-grade securities. Thus, reliance on credit ratings in making investment decisions entails greater risks for high-yield securities than for investment-grade debt securities. The success of a fund's advisor in managing high-yield securities is more dependent upon its own credit analysis than is the case with investment-grade securities. Some high-yield securities are issued by smaller, less-seasoned companies, while others are issued as part of a corporate restructuring, such as an acquisition, merger, or leveraged buyout. Companies that issue high-yield securities are often highly leveraged and may not have available to them more traditional methods of financing. Therefore, the risk associated with acquiring the securities of such issuers generally is greater than is the case with investment-grade securities. Some high-yield securities were once rated as investment-grade but have been downgraded to junk bond status because of financial difficulties experienced by their issuers. The market values of high-yield securities tend to reflect individual issuer developments to a greater extent than do investment-grade securities, which in general react to fluctuations in the general level of interest rates. High-yield securities also tend to be more sensitive to economic conditions than are investment-grade securities. A projection of an economic downturn, for example, could cause a decline in junk bond prices because the advent of a recession could lessen the ability of a highly leveraged company to make principal and interest payments on its debt securities. If an issuer of high-yield securities defaults, in addition to risking payment of all or a portion of interest and principal, a fund investing in such securities may incur additional expenses to seek recovery. The secondary market on which high-yield securities are traded may be less liquid than the market for investment-grade securities. Less liquidity in the secondary trading market could adversely affect the ability of a fund to sell a high-yield security or the price at which a fund could sell a high-yield security, and could adversely affect the daily net asset value of fund shares. When secondary markets for high-yield securities are less liquid than the market for investment-grade securities, it may be more difficult to value the securities because such valuation may require more research, and elements of judgment may play a greater role in the valuation because there is less reliable, objective data available. Except as otherwise provided in a fund's prospectus, if a credit-rating agency changes the rating of a portfolio security held by a fund, the fund may retain the portfolio security if the advisor deems it in the best interests of shareholders. DEPOSITARY RECEIPTS. Depositary receipts are securities that evidence ownership interests in a security or a pool of securities that have been deposited with a "depository." Depositary receipts may be sponsored or unsponsored and include American Depositary Receipts (ADRs), European Depositary Receipts (EDRs) and Global Depositary Receipts (GDRs). For ADRs, the depository is typically a U.S. financial institution and the underlying securities are issued by a foreign issuer. For other depositary receipts, the depository may be a foreign or a U.S. entity, and the underlying securities may have a foreign or a U.S. issuer. Depositary receipts will not necessarily be denominated in the same B-5 currency as their underlying securities. Generally, ADRs are issued in registered form, denominated in U.S. dollars, and designed for use in the U.S. securities markets. Other depositary receipts, such as GDRs and EDRs, may be issued in bearer form and denominated in other currencies, and are generally designed for use in securities markets outside the U.S. Although the two types of depositary receipt facilities (unsponsored or sponsored) are similar, there are differences regarding a holder's rights and obligations and the practices of market participants. A depository may establish an unsponsored facility without participation by (or acquiescence of) the underlying issuer; typically, however, the depository requests a letter of non-objection from the underlying issuer prior to establishing the facility. Holders of unsponsored depositary receipts generally bear all the costs of the facility. The depository usually charges fees upon the deposit and withdrawal of the underlying securities, the conversion of dividends into U.S. dollars or other currency, the disposition of non-cash distributions, and the performance of other services. The depository of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the underlying issuer or to pass through voting rights to depositary receipt holders with respect to the underlying securities. Sponsored depositary receipt facilities are created in generally the same manner as unsponsored facilities, except that sponsored depositary receipts are established jointly by a depository and the underlying issuer through a deposit agreement. The deposit agreement sets out the rights and responsibilities of the underlying issuer, the depository, and the depositary receipt holders. With sponsored facilities, the underlying issuer typically bears some of the costs of the depositary receipts (such as dividend payment fees of the depository), although most sponsored depositary receipts holders may bear costs such as deposit and withdrawal fees. Depositories of most sponsored depositary receipts agree to distribute notices of shareholder meetings, voting instructions, and other shareholder communications and information to the depositary receipt holders at the underlying issuer's request. The depositary of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through, to the holders of the receipts, voting rights with respect to the deposited securities. For purposes of a fund's investment policies, investments in depositary receipts will be deemed to be investments in the underlying securities. Thus, a depositary receipt representing ownership of common stock will be treated as common stock. Depository receipts do not eliminate all of the risks associated with directly investing in the securities of foreign issuers. DERIVATIVES. A derivative is a financial instrument which has a value that is based on--or "derived from"--the values of other assets, reference rates, or indexes. Derivatives may relate to a wide variety of underlying references, such as commodities, stocks, bonds, interest rates, currency exchange rates, and related indexes. Derivatives include futures contracts and options on futures contracts (see additional discussion below), forward-commitment transactions (see additional discussion below), options on securities (see additional discussion below), caps, floors, collars, swap agreements (see additional discussion below), and other financial instruments. Some derivatives, such as futures contracts and certain options, are traded on U.S. commodity and securities exchanges, while other derivatives, such as swap agreements, are privately negotiated and entered into in the over-the-counter (OTC) market. The risks associated with the use of derivatives are different from, and possibly greater than, the risks associated with investing directly in the securities, assets, or market indexes on which the derivatives are based. Derivatives are used by some investors for speculative purposes. Derivatives also may be used for a variety of purposes that do not constitute speculation, such as hedging, risk management, seeking to stay fully invested, seeking to reduce transaction costs, seeking to simulate an investment in equity or debt securities or other investments, seeking to add value by using derivatives to more efficiently implement portfolio positions when derivatives are favorably priced relative to equity or debt securities or other investments, and for other purposes. A fund will not use derivatives for speculation or for the purpose of leveraging (magnifying) investment returns. There is no assurance that any derivatives strategy used by a fund's advisor will succeed. Derivative products are highly specialized instruments that require investment techniques and risk analyses different from those associated with stocks, bonds, and other traditional investments. The use of a derivative requires an understanding not only of the underlying instrument but also of the derivative itself, without the benefit of observing the performance of the derivative under all possible market conditions. The use of a derivative involves the risk that a loss may be sustained as a result of the insolvency or bankruptcy of the other party to the contract (usually referred to as a "counterparty") or the failure of the counterparty to make required payments or otherwise comply with the terms of the contract. Additionally, the use of credit derivatives can result in losses if a fund's advisor does not correctly evaluate the creditworthiness of the issuer on which the credit derivative is based. B-6 Derivatives may be subject to liquidity risk, which exists when a particular derivative is difficult to purchase or sell. If a derivative transaction is particularly large or if the relevant market is illiquid (as is the case with many OTC derivatives), it may not be possible to initiate a transaction or liquidate a position at an advantageous time or price. Derivatives may be subject to pricing or "basis" risk, which exists when a particular derivative becomes extraordinarily expensive relative to historical prices or the prices of corresponding cash market instruments. Under certain market conditions, it may not be economically feasible to initiate a transaction or liquidate a position in time to avoid a loss or take advantage of an opportunity. Because many derivatives have a leverage component, adverse changes in the value or level of the underlying asset, reference rate, or index can result in a loss substantially greater than the amount invested in the derivative itself. Certain derivatives have the potential for unlimited loss, regardless of the size of the initial investment. A derivative transaction will not be considered to constitute the issuance of a "senior security" by a fund, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction in accordance with the requirements, and subject to the risks, described above under the heading "Borrowing." Like most other investments, derivative instruments are subject to the risk that the market value of the instrument will change in a way detrimental to a fund's interest. A fund bears the risk that its advisor will incorrectly forecast future market trends or the values of assets, reference rates, indexes, or other financial or economic factors in establishing derivative positions for the fund. If the advisor attempts to use a derivative as a hedge against, or as a substitute for, a portfolio investment, the fund will be exposed to the risk that the derivative will have or will develop imperfect or no correlation with the portfolio investment. This could cause substantial losses for the fund. While hedging strategies involving derivative instruments can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other fund investments. Many derivatives, in particular OTC derivatives, are complex and often valued subjectively. Improper valuations can result in increased cash payment requirements to counterparties or a loss of value to a fund. EXCHANGE-TRADED FUNDS. A fund may purchase shares of exchange-traded funds (ETFs), including ETF shares issued by other Vanguard funds. Typically, a fund would purchase ETF shares for the same reason it would purchase (and as an alternative to purchasing) futures contracts: to obtain exposure to all or a portion of the stock or bond market. ETF shares enjoy several advantages over futures. Depending on the market, the holding period, and other factors, ETF shares can be less costly and more tax-efficient than futures. In addition, ETF shares can be purchased for smaller sums, offer exposure to market sectors and styles for which there is no suitable or liquid futures contract, and do not involve leverage. Most ETFs are investment companies. Therefore, a fund's purchases of ETF shares generally are subject to the limitations on, and the risks of, a fund's investments in other investment companies, which are described below under the heading "Other Investment Companies." An investment in an ETF generally presents the same primary risks as an investment in a conventional fund (i.e., one that is not exchange traded) that has the same investment objective, strategies, and policies. The price of an ETF can fluctuate within a wide range, and a fund could lose money investing in an ETF if the prices of the securities owned by the ETF go down. In addition, ETFs are subject to the following risks that do not apply to conventional funds: (1) the market price of the ETF's shares may trade at a discount to their net asset value; (2) an active trading market for an ETF's shares may not develop or be maintained; or (3) trading of an ETF's shares may be halted if the listing exchange's officials deem such action appropriate, the shares are de-listed from the exchange, or the activation of market-wide "circuit breakers" (which are tied to large decreases in stock prices) halts stock trading generally. FOREIGN SECURITIES. Foreign securities are equity or debt securities issued by entities organized, domiciled, or with a principal place of business outside the United States, such as foreign corporations and governments. Foreign securities may trade in U.S. or foreign securities markets. A fund may make foreign investments either directly by purchasing foreign securities or indirectly by purchasing depositary receipts or depositary shares of similar instruments (depositary receipts) for foreign securities (see discussion above). Depositary receipts are securities that are listed on exchanges or quoted in OTC markets in one country but represent shares of issuers domiciled in another country. Direct investments in foreign securities may be made either on foreign securities exchanges or in the OTC markets. Investing in foreign securities involves certain special risk considerations that are not typically associated with investing in securities of U.S. companies or governments. Because foreign issuers are not generally subject to uniform accounting, auditing, and financial reporting standards and practices comparable to those applicable to U.S. issuers, there may be less publicly available information about B-7 certain foreign issuers than about U.S. issuers. Evidence of securities ownership may be uncertain in many foreign countries. As a result, there is a risk that a fund's trade details could be incorrectly or fraudulently entered at the time of the transaction, resulting in a loss to the fund. Securities of foreign issuers are generally less liquid than securities of comparable U.S. issuers. In certain countries, there is less government supervision and regulation of stock exchanges, brokers, and listed companies than in the U.S. In addition, with respect to certain foreign countries, there is the possibility of expropriation or confiscatory taxation, political or social instability, war, terrorism, nationalization, limitations on the removal of funds or other assets, or diplomatic developments which could affect U.S. investments in those countries. Although an advisor will endeavor to achieve most favorable execution costs for a fund's portfolio transactions in foreign securities under the circumstances, commissions (and other transaction costs) are generally higher than those on U.S. securities. In addition, it is expected that the expenses for custodian arrangements of the fund's foreign securities will be somewhat greater than the expenses for a fund that invests primarily in domestic securities. Certain foreign governments levy withholding taxes against dividend and interest income from foreign securities. Although in some countries a portion of these taxes is recoverable by the fund, the non-recovered portion of foreign withholding taxes will reduce the income received from the companies making up a fund. The value of the foreign securities held by a fund that are not U.S. dollar-denominated may be significantly affected by changes in currency exchange rates. The U.S. dollar value of a foreign security generally decreases when the value of the U.S. dollar rises against the foreign currency in which the security is denominated and tends to increase when the value of the U.S. dollar falls against such currency (as discussed below, a fund may attempt to hedge its currency risks). In addition, the value of fund assets may be affected by losses and other expenses incurred in converting between various currencies in order to purchase and sell foreign securities, and by currency restrictions, exchange control regulation, currency devaluations, and political and economic developments. FOREIGN SECURITIES -- EMERGING MARKET RISK. Investing in emerging market countries involves certain risks not typically associated with investing in the United States, and imposes risks greater than, or in addition to, risks of investing in more developed foreign countries. These risks include, but are not limited to, the following: greater risks of nationalization or expropriation of assets or confiscatory taxation; currency devaluations and other currency exchange rate fluctuations; greater social, economic, and political uncertainty and instability (including amplified risk of war and terrorism); more substantial government involvement in the economy; less government supervision and regulation of the securities markets and participants in those markets; controls on foreign investment and limitations on repatriation of invested capital and on the fund's ability to exchange local currencies for U.S. dollars; unavailability of currency hedging techniques in certain emerging market countries; the fact that companies in emerging market countries may be smaller, less seasoned, and newly organized companies; the difference in, or lack of, auditing and financial reporting standards, which may result in unavailability of material information about issuers; the risk that it may be more difficult to obtain and/or enforce a judgment in a court outside the United States; and greater price volatility, substantially less liquidity, and significantly smaller market capitalization of securities markets. Also, any change in the leadership or politics of emerging market countries, or the countries that exercise a significant influence over those countries, may halt the expansion of or reverse the liberalization of foreign investment policies now occurring and adversely affect existing investment opportunities. Furthermore, high rates of inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and securities markets of certain emerging market countries. FOREIGN SECURITIES -- FOREIGN CURRENCY TRANSACTIONS. The value in U.S. dollars of a fund's non-dollar-denominated foreign securities may be affected favorably or unfavorably by changes in foreign currency exchange rates and exchange control regulations, and the fund may incur costs in connection with conversions between various currencies. To seek to minimize the impact of such factors on net asset values, a fund may engage in foreign currency transactions in connection with its investments in foreign securities. A fund will not speculate in foreign currency exchange and will enter into foreign currency transactions only to attempt to "hedge" the currency risk associated with investing in foreign securities. Although such transactions tend to minimize the risk of loss that would result from a decline in the value of the hedged currency, they also may limit any potential gain that might result should the value of such currency increase. Currency exchange transactions may be conducted either on a spot (i.e., cash) basis at the rate prevailing in the currency exchange market, or through forward contracts to purchase or sell foreign currencies. A forward currency contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These contracts are entered into with large commercial banks or other currency traders who are participants in the interbank market. Currency exchange transactions also may be effected through the use of swap agreements or other B-8 derivatives. Currency exchange transactions may be considered borrowings. A currency exchange transaction will not be considered to constitute the issuance of a "senior security" by a fund for purposes of the 1940 Act, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction in accordance with the requirements, and subject to the risks, described above under the heading "Borrowing." By entering into a forward contract for the purchase or sale of foreign currency involved in underlying security transactions, a fund may be able to protect itself against part or all of the possible loss between trade and settlement dates for that purchase or sale resulting from an adverse change in the relationship between the U.S. dollar and such foreign currency. This practice is sometimes referred to as "transaction hedging." In addition, when the advisor reasonably believes that a particular foreign currency may suffer a substantial decline against the U.S. dollar, a fund may enter into a forward contract to sell an amount of foreign currency approximating the value of some or all of its portfolio securities denominated in such foreign currency. This practice is sometimes referred to as "portfolio hedging." Similarly, when the advisor reasonably believes that the U.S. dollar may suffer a substantial decline against a foreign currency, a fund may enter into a forward contract to buy that foreign currency for a fixed dollar amount. A fund may also attempt to hedge its foreign currency exchange rate risk by engaging in currency futures, options, and "cross-hedge" transactions. In cross-hedge transactions, a fund holding securities denominated in one foreign currency will enter into a forward currency contract to buy or sell a different foreign currency (one that the advisor reasonably believes generally tracks the currency being hedged with regard to price movements). The advisor may select the tracking (or substitute) currency rather than the currency in which the security is denominated for various reasons, including in order to take advantage of pricing or other opportunities presented by the tracking currency or because the market for the tracking currency is more liquid or more efficient. Such cross-hedges are expected to help protect a fund against an increase or decrease in the value of the U.S. dollar against certain foreign currencies. A fund may hold a portion of its assets in bank deposits denominated in foreign currencies, so as to facilitate investment in foreign securities as well as protect against currency fluctuations and the need to convert such assets into U.S. dollars (thereby also reducing transaction costs). To the extent these monies are converted back into U.S. dollars, the value of the assets so maintained will be affected favorably or unfavorably by changes in foreign currency exchange rates and exchange control regulations. The forecasting of currency market movement is extremely difficult, and whether any hedging strategy will be successful is highly uncertain. Moreover, it is impossible to forecast with precision the market value of portfolio securities at the expiration of a foreign currency forward contract. Accordingly, a fund may be required to buy or sell additional currency on the spot market (and bear the expense of such transaction) if its advisor's predictions regarding the movement of foreign currency or securities markets prove inaccurate. In addition, the use of cross-hedging transactions may involve special risks, and may leave a fund in a less advantageous position than if such a hedge had not been established. Because foreign currency forward contracts are privately negotiated transactions, there can be no assurance that a fund will have flexibility to roll-over a foreign currency forward contract upon its expiration if it desires to do so. Additionally, there can be no assurance that the other party to the contract will perform its services thereunder. FOREIGN SECURITIES -- FOREIGN INVESTMENT COMPANIES. Some of the countries in which a fund may invest may not permit, or may place economic restrictions on, direct investment by outside investors. Fund investments in such countries may be permitted only through foreign government-approved or authorized investment vehicles, which may include other investment companies. Such investments may be made through registered or unregistered closed-end investment companies that invest in foreign securities. Investing through such vehicles may involve frequent or layered fees or expenses and may also be subject to the limitations on, and the risks of, a fund's investments in other investment companies, which are described below under the heading "Other Investment Companies." FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. Futures contracts and options on futures contracts are derivatives (see additional discussion above). A futures contract is a standardized agreement between two parties to buy or sell at a specific time in the future a specific quantity of a commodity at a specific price. The commodity may consist of an asset, a reference rate, or an index. A security futures contract relates to the sale of a specific quantity of shares of a single equity security or a narrow-based securities index. The value of a futures contract tends to increase and decrease in tandem with the value of the underlying commodity. The buyer of a futures contract enters into an agreement to purchase the underlying commodity on the settlement date and is said to be "long" the contract. The seller of a futures contract enters into an agreement to sell the underlying commodity on the settlement date and is said B-9 to be "short" the contract. The price at which a futures contract is entered into is established by open outcry on the floor of an exchange between exchange members acting as traders or brokers. Open futures contracts can be liquidated or closed out by physical delivery of the underlying commodity or payment of the cash settlement amount on the settlement date, depending on the terms of the particular contract. Some financial futures contracts (such as security futures) provide for physical settlement at maturity. Other financial futures contracts (such as those relating to interest rates, foreign currencies and broad-based securities indexes) generally provide for cash settlement at maturity. In the case of cash settled futures contracts, the cash settlement amount is equal to the difference between the final settlement price on the last trading day of the contract and the price at which the contract was entered into. Most futures contracts, however, are not held until maturity but instead are "offset" before the settlement date through the establishment of an opposite and equal futures position. The purchaser or seller of a futures contract is not required to deliver or pay for the underlying commodity unless the contract is held until the settlement date. However, both the purchaser and seller are required to deposit "initial margin" with a futures commission merchant (FCM) when the futures contract is entered into. Initial margin deposits are typically calculated as a percentage of the contract's market value. If the value of either party's position declines, that party will be required to make additional "variation margin" payments to settle the change in value on a daily basis. This process is known as "marking-to-market." A futures transaction will not be considered to constitute the issuance of a "senior security" by a fund for purposes of the 1940 Act, and such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction in accordance with the requirements, and subject to the risks, described above under the heading "Borrowing." An option on a futures contract (or futures option) conveys the right, but not the obligation, to purchase (in the case of a call option) or sell (in the case of a put option) a specific futures contract at a specific price (called the "exercise" or "strike" price) any time before the option expires. The buyer of a call option is said to go "long" a futures contract, while the buyer of a put option is said to go "short" a futures contract. The seller of an option is called an option writer. The purchase price of an option is called the premium. The potential loss to an option buyer is limited to the amount of the premium plus transaction costs. This will be the case, for example, if the option is held and not exercised prior to its expiration date. Generally, an option writer sells options with the goal of obtaining the premium paid by the option buyer. If an option sold by an option writer expires without being exercised, the writer retains the full amount of the premium. The option writer, however, has unlimited economic risk because its potential loss, except to the extent offset by the premium received when the option was written, is equal to the amount the option is "in-the-money" at the expiration date. A call option is in-the-money if the value of the underlying futures contract exceeds the exercise price of the option. A put option is in-the-money if the exercise price of the option exceeds the value of the underlying futures contract. Generally, any profit realized by an option buyer represents a loss for the option writer. A fund that takes the position of a writer of a futures option is required to deposit and maintain initial and variation margin with respect to the option, as described above in the case of futures contracts. A futures option transaction will not be considered to constitute the issuance of a "senior security" by a fund for purposes of the 1940 Act, and such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction in accordance with the requirements, and subject to the risks, described above under the heading "Borrowing." Each fund intends to comply with Rule 4.5 of the Commodity Futures Trading Commission, under which a mutual fund is conditionally excluded from the definition of the term "commodity pool operator." A fund will only enter into futures contracts and futures options which are standardized and traded on a U.S. or foreign exchange, board of trade, or similar entity, or quoted on an automated quotation system. FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS -- RISKS. The risk of loss in trading futures contracts and in writing futures options can be substantial, because of the low margin deposits required, the extremely high degree of leverage involved in futures and options pricing, and the potential high volatility of the futures markets. As a result, a relatively small price movement in a futures position may result in immediate and substantial loss (or gain) to the investor. For example, if at the time of purchase, 10% of the value of the futures contract is deposited as margin, a subsequent 10% decrease in the value of the futures contract would result in a total loss of the margin deposit, before any deduction for the transaction costs, if the account were then closed out. A 15% decrease would result in a loss equal to 150% of the original margin deposit if the contract were closed out. Thus, a purchase or sale of a futures contract, and the writing of a futures option, may result in losses in excess of the amount invested in the position. In the event of adverse price movements, a fund would continue to be required to make daily cash payments to maintain its B-10 required margin. In such situations, if the fund has insufficient cash, it may have to sell portfolio securities to meet daily margin requirements (and segregation requirements, if applicable) at a time when it may be disadvantageous to do so. In addition, on the settlement date, a fund may be required to make delivery of the instruments underlying the futures positions it holds. A fund could suffer losses if it is unable to close out a futures contract or a futures option because of an illiquid secondary market. Futures contracts and futures options may be closed out only on an exchange which provides a secondary market for such products. However, there can be no assurance that a liquid secondary market will exist for any particular futures product at any specific time. Thus, it may not be possible to close a futures or option position. Moreover, most futures exchanges limit the amount of fluctuation permitted in futures contract prices during a single trading day. The daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day's settlement price at the end of a trading session. Once the daily limit has been reached in a particular type of contract, no trades may be made on that day at a price beyond that limit. The daily limit governs only price movement during a particular trading day and therefore does not limit potential losses, because the limit may prevent the liquidation of unfavorable positions. Futures contract prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of future positions and subjecting some futures traders to substantial losses. The inability to close futures and options positions also could have an adverse impact on the ability to hedge a portfolio investment or to establish a substitute for a portfolio investment. A fund bears the risk that its advisor will incorrectly predict future market trends. If the advisor attempts to use a futures contract or a futures option as a hedge against, or as a substitute for, a portfolio investment, the fund will be exposed to the risk that the futures position will have or will develop imperfect or no correlation with the portfolio investment. This could cause substantial losses for the fund. While hedging strategies involving futures products can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other fund investments. A fund could lose margin payments it has deposited with its FCM, if, for example, the FCM breaches its agreement with the fund or becomes insolvent or goes into bankruptcy. In that event, the fund may be entitled to return of margin owed to it only in proportion to the amount received by the FCM's other customers, potentially resulting in losses to the fund. INTERFUND BORROWING AND LENDING. The SEC has granted an exemption permitting the Vanguard funds to participate in Vanguard's interfund lending program. This program allows the Vanguard funds to borrow money from and lend money to each other for temporary or emergency purposes. The program is subject to a number of conditions, including the requirement that no fund may borrow or lend money through the program unless it receives a more favorable interest rate than is available from a typical bank for a comparable transaction. In addition, a Vanguard fund may participate in the program only if and to the extent that such participation is consistent with the fund's investment objective and other investment policies. The boards of trustees of the Vanguard funds are responsible for overseeing the interfund lending program. OPTIONS. An option is a derivative (see additional discussion above). An option on a security (or index) is a contract that gives the holder of the option, in return for the payment of a "premium," the right, but not the obligation, to buy from (in the case of a call option) or sell to (in the case of a put option) the writer of the option the security underlying the option (or the cash value of the index) at a specified exercise price at any time during the term of the option. The writer of an option on a security has the obligation upon exercise of the option (1) to deliver the underlying security upon payment of the exercise price (in the case of a call option) or (2) to pay the exercise price upon delivery of the underlying security (in the case of a put option). The writer of an option on an index has the obligation upon exercise of the option to pay an amount equal to the cash value of the index minus the exercise price, multiplied by the specified multiplier for the index option. The multiplier for an index option determines the size of the investment position the option represents. Unlike exchange-traded options, which are standardized with respect to the underlying instrument, expiration date, contract size, and strike price, the terms of OTC options (options not traded on exchanges) generally are established through negotiation with the other party to the option contract. While this type of arrangement allows the purchaser or writer greater flexibility to tailor an option to its needs, OTC options generally involve greater credit risk than exchange-traded options, which are guaranteed by the clearing organization of the exchanges where they are traded. The buyer of a call option is said to go "long" on the underlying position, while the buyer of a put option is said to go "short" the underlying position. The seller of an option is called an option writer. The purchase price of an option is called B-11 the "premium." The potential loss to an option buyer is limited to the amount of the premium plus transaction costs. This will be the case if the option is held and not exercised prior to its expiration date. Generally, an option writer sells options with the goal of obtaining the premium paid by the option buyer, but that person could also seek to profit from an anticipated rise or decline in option prices. If an option sold by an option writer expires without being exercised, the writer retains the full amount of the premium. The option writer, however, has unlimited economic risk because its potential loss, except to the extent offset by the premium received when the option was written, is equal to the amount the option is "in-the-money" at the expiration date. A call option is in-the-money if the value of the underlying position exceeds the exercise price of the option. A put option is in-the-money if the exercise price of the option exceeds the value of the underlying position. Generally, any profit realized by an option buyer represents a loss for the option writer. The writing of an option will not be considered to constitute the issuance of a "senior security" by a fund for purposes of the 1940 Act, and such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction in accordance with the requirements, and subject to the risks, described above under the heading "Borrowing." If a trading market in particular options were to become unavailable, investors in those options (such as the funds) would be unable to close out their positions until trading resumes, and they may be faced with substantial losses if the value of the underlying interest moves adversely during that time. Even if the market were to remain available, there may be times when options prices will not maintain their customary or anticipated relationships to the prices of the underlying interests and related interests. Lack of investor interest, changes in volatility, or other factors or conditions might adversely affect the liquidity, efficiency, continuity, or even the orderliness of the market for particular options. A fund bears the risk that its advisor will not accurately predict future market trends. If the advisor attempts to use an option as a hedge against, or as a substitute for, a portfolio investment, the fund will be exposed to the risk that the option will have or will develop imperfect or no correlation with the portfolio investment. This could cause substantial losses for the fund. While hedging strategies involving options can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other fund investments. Many options, in particular OTC options, are complex and often valued based on subjective factors. Improper valuations can result in increased cash payment requirements to counterparties or a loss of value to a fund. OTHER INVESTMENT COMPANIES. A fund may invest in other investment companies to the extent permitted by applicable law or SEC order. Under the 1940 Act, a fund generally may invest up to 10% of its assets in shares of investment companies and up to 5% of its assets in any one investment company, as long as the investment does not represent more than 3% of the voting stock of the acquired investment company. If a fund invests in other investment companies, shareholders will bear not only their proportionate share of the fund's expenses (including operating expenses and the fees of the advisor), but also, indirectly, the similar expenses of the underlying investment companies. Shareholders would also be exposed to the risks associated not only to the investments of the fund but also to the portfolio investments of the underlying investment companies. Certain types of investment companies, such as closed-end investment companies, issue a fixed number of shares that typically trade on a stock exchange or over-the-counter at a premium or discount to their net asset value. Others are continuously offered at net asset value but also may be traded in the secondary market. PREFERRED STOCK. Preferred stock represents an equity or ownership interest in an issuer. Preferred stock normally pays dividends at a specified rate and has precedence over common stock in the event the issuer is liquidated or declares bankruptcy. However, in the event an issuer is liquidated or declares bankruptcy, the claims of owners of bonds take precedence over the claims of those who own preferred and common stock. Preferred stock, unlike common stock, often has a stated dividend rate payable from the corporation's earnings. Preferred stock dividends may be cumulative or non-cumulative, participating, or auction rate. "Cumulative" dividend provisions require all or a portion of prior unpaid dividends to be paid before dividends can be paid to the issuer's common stock. "Participating" preferred stock may be entitled to a dividend exceeding the stated dividend in certain cases. If interest rates rise, the fixed dividend on preferred stocks may be less attractive, causing the price of such stocks to decline. Preferred stock may have mandatory sinking fund provisions, as well as provisions allowing the stock to be called or redeemed, which can limit the benefit of a decline in interest rates. Preferred stock is subject to many of the risks to which common stock and debt securities are subject. REPURCHASE AGREEMENTS. A repurchase agreement is an agreement under which a fund acquires a fixed income security (generally a security issued by the U.S. Government or an agency thereof, a banker's acceptance, or a certificate of deposit) from a commercial bank, broker, or dealer, and simultaneously agrees to resell such security to B-12 the seller at an agreed upon price and date (normally, the next business day). Because the security purchased constitutes collateral for the repurchase obligation, a repurchase agreement may be considered a loan that is collateralized by the security purchased. The resale price reflects an agreed upon interest rate effective for the period the instrument is held by a fund and is unrelated to the interest rate on the underlying instrument. In these transactions, the securities acquired by a fund (including accrued interest earned thereon) must have a total value in excess of the value of the repurchase agreement and be held by a custodian bank until repurchased. In addition, the investment advisor will monitor a fund's repurchase agreement transactions generally and will evaluate the creditworthiness of any bank, broker, or dealer party to a repurchase agreement relating to a fund. The use of repurchase agreements involves certain risks. One risk is the seller's ability to pay the agreed-upon repurchase price on the repurchase date. If the seller defaults, the fund may incur costs in disposing of the collateral, which would reduce the amount realized thereon. If the seller seeks relief under the bankruptcy laws, the disposition of the collateral may be delayed or limited. For example, if the other party to the agreement becomes insolvent and subject to liquidation or reorganization under the bankruptcy or other laws, a court may determine that the underlying security is collateral for a loan by the fund not within its control and therefore the realization by the fund on such collateral may be automatically stayed. Finally, it is possible that the fund may not be able to substantiate its interest in the underlying security and may be deemed an unsecured creditor of the other party to the agreement. RESTRICTED AND ILLIQUID SECURITIES. Illiquid securities are securities that cannot be sold or disposed of in the ordinary course of business within seven business days at approximately the value at which they are being carried on a fund's books. Illiquid securities may include a wide variety of investments, such as: (1) repurchase agreements maturing in more than seven days; (2) OTC options contracts, and certain other derivatives (including certain swap agreements); (3) fixed time deposits that are not subject to prepayment or do not provide for withdrawal penalties upon prepayment (other than overnight deposits); (4) participation interests in loans; (5) municipal lease obligations; (6) commercial paper issued pursuant to Section 4(2) of the Securities Act of 1933 (the 1933 Act); and (7) securities whose disposition is restricted under the federal securities laws. Illiquid securities include restricted, privately placed securities that, under the federal securities laws, generally may be resold only to qualified institutional buyers. If a substantial market develops for a restricted security (or other illiquid investment) held by a fund, it may be treated as a liquid security, in accordance with procedures and guidelines approved by the board of trustees. This generally includes securities that are unregistered that can be sold to qualified institutional buyers in accordance with Rule 144A under the 1933 Act or that are exempt from registration under the 1933 Act, such as commercial paper. While a fund's advisor monitors the liquidity of restricted securities on a daily basis, the board of trustees oversees and retains ultimate responsibility for the advisor's liquidity determinations. Several factors that the trustees consider in monitoring these decisions include the valuation of a security, the availability of qualified institutional buyers, brokers and dealers that trade in the security, and the availability of information about the security's issuer. REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, a fund sells a security to another party, such as a bank or broker-dealer, in return for cash and agrees to repurchase that security at an agreed-upon price and time. Under a reverse repurchase agreement, the fund continues to receive any principal and interest payments on the underlying security during the term of the agreement. Reverse repurchase agreements involve the risk that the market value of securities retained by the fund may decline below the repurchase price of the securities sold by the fund which it is obligated to repurchase. A reverse repurchase agreement may be considered a borrowing transaction for purposes of the 1940 Act. A reverse repurchase agreement transaction will not be considered to constitute the issuance of a "senior security" by a fund, and such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction in accordance with the requirements, and subject to the risks, described above under the heading "Borrowing." A fund will enter into reverse repurchase agreements only with parties whose creditworthiness has been reviewed and found satisfactory by the advisor. SECURITIES LENDING. A fund may lend its investment securities to qualified institutional investors (typically brokers, dealers, banks, or other financial institutions) who may need to borrow securities in order to complete certain transactions, such as covering short sales, avoiding failures to deliver securities, or completing arbitrage operations. By lending its investment securities, a fund attempts to increase its net investment income through the receipt of interest on the securities lent. Any gain or loss in the market price of the securities lent that might occur during the term of the loan would be for the account of the fund. If the borrower defaults on its obligation to return the securities lent because of insolvency or other reasons, a fund could experience delays and costs in recovering the securities lent or in gaining access to the collateral. These delays and costs could be greater for foreign securities. If a fund is not able to recover the B-13 securities lent, a fund may sell the collateral and purchase a replacement investment in the market. The value of the collateral could decrease below the value of the replacement investment by the time the replacement investment is purchased. Cash received as collateral through loan transactions may be invested in other eligible securities. Investing this cash subjects that investment to market appreciation or depreciation. The terms and the structure and the aggregate amount of securities loans must be consistent with the 1940 Act, and the rules or interpretations of the SEC thereunder. These provisions limit the amount of securities a fund may lend to 33 1/3% of the fund's total assets, and require that (1) the borrower pledge and maintain with the fund collateral consisting of cash, an irrevocable letter of credit or securities issued or guaranteed by the U.S. Government having at all times not less than 100% of the value of the securities lent, (2) the borrower add to such collateral whenever the price of the securities lent rises (i.e., the borrower "marks-to-market" on a daily basis), (3) the loan be made subject to termination by the fund at any time, and (4) the fund receive reasonable interest on the loan (which may include the fund's investing any cash collateral in interest bearing short-term investments), any distribution on the lent securities, and any increase in their market value. Loan arrangements made by each fund will comply with all other applicable regulatory requirements, including the rules of the New York Stock Exchange, which presently require the borrower, after notice, to redeliver the securities within the normal settlement time of three business days. The advisor will consider the creditworthiness of the borrower, among other things, in making decisions with respect to the lending of securities, subject to oversight by the board of trustees. At the present time, the SEC does not object if an investment company pays reasonable negotiated fees in connection with lent securities, so long as such fees are set forth in a written contract and approved by the investment company's trustees. In addition, voting rights pass with the lent securities, but if a material event occurs affecting an investment on loan, the loan must be called and the securities voted. SWAP AGREEMENTS. A swap agreement is a derivative (see additional discussion above). A swap agreement is an agreement between two parties (counterparties) to exchange payments at specified dates (periodic payment dates) on the basis of a specified amount (notional amount) with the payments calculated with reference to a specified asset, reference rate, or index. Examples of swap agreements include, but are not limited to, interest rate swaps, credit default swaps, equity swaps, commodity swaps, foreign currency swaps, index swaps, and total return swaps. Most swap agreements provide that when the periodic payment dates for both parties are the same, payments are netted, and only the net amount is paid to the counterparty entitled to receive the net payment. Consequently, a fund's current obligations (or rights) under a swap agreement will generally be equal only to the net amount to be paid or received under the agreement, based on the relative values of the positions held by each counterparty. Swap agreements allow for a wide variety of transactions. For example, fixed rate payments may be exchanged for floating rate payments; U.S. dollar-denominated payments may be exchanged for payments denominated in a different currency; and payments tied to the price of one asset, reference rate, or index may be exchanged for payments tied to the price of another asset, reference rate, or index. An option on a swap agreement, also called a "swaption," is an option that gives the buyer the right, but not the obligation, to enter into a swap on a future date in exchange for paying a market-based "premium." A receiver swaption gives the owner the right to receive the total return of a specified asset, reference rate, or index. A payer swaption gives the owner the right to pay the total return of a specified asset, reference rate, or index. Swaptions also include options that allow an existing swap to be terminated or extended by one of the counterparties. The use of swap agreements by a fund entails certain risks, which may be different from, or possibly greater than, the risks associated with investing directly in the securities and other investments that are the referenced asset for the swap agreement. Swaps are highly specialized instruments that require investment techniques, risk analyses, and tax planning different from those associated with stocks, bonds, and other traditional investments. The use of a swap requires an understanding not only of the referenced asset, reference rate, or index but also of the swap itself, without the benefit of observing the performance of the swap under all possible market conditions. Swap agreements may be subject to liquidity risk, which exists when a particular swap is difficult to purchase or sell. If a swap transaction is particularly large or if the relevant market is illiquid (as is the case with many OTC swaps), it may not be possible to initiate a transaction or liquidate a position at an advantageous time or price, which may result in significant losses. In addition, swap transaction may be subject to a fund's limitation on investments in illiquid securities. Swap agreements may be subject to pricing risk, which exists when a particular swap becomes extraordinarily expensive (or cheap) relative to historical prices or the prices of corresponding cash market instruments. Under certain B-14 market conditions, it may not be economically feasible to initiate a transaction or liquidate a position in time to avoid a loss or take advantage of an opportunity or to realize the intrinsic value of the swap agreement. Because some swap agreements have a leverage component, adverse changes in the value or level of the underlying asset, reference rate or index can result in a loss substantially greater than the amount invested in the swap itself. Certain swaps have the potential for unlimited loss, regardless of the size of the initial investment. A leveraged swap transaction will not be considered to constitute the issuance of a "senior security" by a fund, and such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction in accordance with the requirements, and subject to the risks, described above under the heading "Borrowing." Like most other investments, swap agreements are subject to the risk that the market value of the instrument will change in a way detrimental to a fund's interest. A fund bears the risk that its advisor will not accurately forecast future market trends or the values of assets, reference rates, indexes, or other economic factors in establishing swap positions for the fund. If the advisor attempts to use a swap as a hedge against, or as a substitute for, a portfolio investment, the fund will be exposed to the risk that the swap will have or will develop imperfect or no correlation with the portfolio investment. This could cause substantial losses for the fund. While hedging strategies involving swap instruments can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other fund investments. Many swaps, in particular OTC swaps, are complex and often valued subjectively. Improper valuations can result in increased cash payment requirements to counterparties or a loss of value to a fund. The use of a swap agreement also involves the risk that a loss may be sustained as a result of the insolvency or bankruptcy of the counterparty or the failure of the counterparty to make required payments or otherwise comply with the terms of the agreement. Additionally, the use of credit default swaps can result in losses if a fund's advisor does not correctly evaluate the creditworthiness of the issuer on which the credit swap is based. The swaps market is a relatively new market and is largely unregulated. It is possible that developments in the swaps market, including potential government regulation, could adversely affect a fund's ability to terminate existing swap agreements or to realize amounts to be received under such agreements. TAX MATTERS -- FEDERAL TAX TREATMENT OF FUTURES CONTRACTS. A fund is required for federal income tax purposes to recognize as income for each taxable year its net unrealized gains and losses on certain futures contracts as of the end of the year as well as those actually realized during the year. In these cases, any gain or loss recognized with respect to a futures contract is considered to be 60% long-term capital gain or loss and 40% short-term capital gain or loss, without regard to the holding period of the contract. Gains and losses on certain other futures contracts (primarily non-U.S. futures contracts) are not recognized until the contracts are closed and are treated as long-term or short-term, depending on the holding period of the contract. Sales of futures contracts that are intended to hedge against a change in the value of securities held by a fund may affect the holding period of such securities and, consequently, the nature of the gain or loss on such securities upon disposition. A fund may be required to defer the recognition of losses on one position, such as futures contracts, to the extent of any unrecognized gains on a related offsetting position held by the fund. In order for a fund to continue to qualify for federal income tax treatment as a regulated investment company, at least 90% of its gross income for a taxable year must be derived from qualifying income; i.e., dividends, interest, income derived from loans of securities, gains from the sale of securities or of foreign currencies, or other income derived with respect to the fund's business of investing in securities or currencies. It is anticipated that any net gain recognized on futures contracts will be considered qualifying income for purposes of the 90% requirement. A fund will distribute to shareholders annually any net capital gains which have been recognized for federal income tax purposes on futures transactions. Such distributions will be combined with distributions of capital gains realized on the fund's other investments and shareholders will be advised on the nature of the distributions. TAX MATTERS -- FEDERAL TAX TREATMENT OF NON-U.S. TRANSACTIONS. Special rules govern the Federal income tax treatment of certain transactions denominated in a currency other than the U.S. dollar or determined by reference to the value of one or more currencies other than the U.S. dollar. The types of transactions covered by the special rules include the following: (1) the acquisition of, or becoming the obligor under, a bond or other debt instrument (including, to the extent provided in Treasury regulations, preferred stock); (2) the accruing of certain trade receivables and payables; and (3) the entering into or acquisition of any forward contract, futures contract, option, or similar financial instrument if such instrument is not marked to market. The disposition of a currency other than the U.S. dollar by a taxpayer whose B-15 functional currency is the U.S. dollar is also treated as a transaction subject to the special currency rules. However, foreign currency-related regulated futures contracts and non-equity options are generally not subject to the special currency rules if they are or would be treated as sold for their fair market value at year-end under the marking-to-market rules applicable to other futures contracts unless an election is made to have such currency rules apply. With respect to transactions covered by the special rules, foreign currency gain or loss is calculated separately from any gain or loss on the underlying transaction and is normally taxable as ordinary income or loss. A taxpayer may elect to treat as capital gain or loss foreign currency gain or loss arising from certain identified forward contracts, futures contracts, and options that are capital assets in the hands of the taxpayer and which are not part of a straddle. The Treasury Department issued regulations under which certain transactions subject to the special currency rules that are part of a "section 988 hedging transaction" (as defined in the Code and the Treasury regulations) will be integrated and treated as a single transaction or otherwise treated consistently for purposes of the Code. Any gain or loss attributable to the foreign currency component of a transaction engaged in by a fund which is not subject to the special currency rules (such as foreign equity investments other than certain preferred stocks) will be treated as capital gain or loss and will not be segregated from the gain or loss on the underlying transaction. It is anticipated that some of the non-U.S. dollar-denominated investments and foreign currency contracts a fund may make or enter into will be subject to the special currency rules described above. TAX MATTERS -- FOREIGN TAX CREDIT. Foreign governments may withhold taxes on dividends and interest paid with respect to foreign securities held by a fund. Foreign governments may also impose taxes on other payments or gains with respect to foreign securities. If, at the close of its fiscal year, more than 50% of a fund's total assets are invested in securities of foreign issuers, the fund may elect to pass through foreign taxes paid, and thereby allow shareholders to take a deduction or, if they meet certain holding period requirements, a tax credit on their tax returns. If shareholders do not meet the holding period requirements, they may still be entitled to a deduction for certain gains that were actually distributed by the fund, but will also show the amount of the available offsetting credit or deduction. TEMPORARY INVESTMENTS. A fund may take temporary defensive measures that are inconsistent with the fund's normal fundamental or non-fundamental investment policies and strategies in response to adverse market, economic, political, or other conditions as determined by the advisor. Such measures could include, but are not limited to, investments in (1) highly liquid short-term fixed income securities issued by or on behalf of municipal or corporate issuers, obligations of the U.S. Government and its agencies, commercial paper, and bank certificates of deposit; (2) shares of other investment companies which have investment objectives consistent with those of the fund; (3) repurchase agreements involving any such securities; and (4) other money market instruments. There is no limit on the extent to which the fund may take temporary defensive measures. In taking such measures, the fund may fail to achieve its investment objective. VIPER SHARES. VIPER Shares are exchange-traded shares that represent an interest in an investment portfolio held by Vanguard index funds. "VIPER" stands for Vanguard Index Participation Equity Receipts. Any fund that issues VIPER Shares may repurchase those shares on the open market at the current market price if doing so would be advantageous for the fund. A repurchase might be advantageous, for example, because the VIPER Shares are more cost-effective than alternative investments, are selling at a discount to net asset value, will cause the fund to more closely track its index than alternative investments, or some combination of the three. A fund that repurchases its VIPER Shares also may lend those shares to qualified institutional borrowers as part of the fund's securities lending activities. A fund's investments in VIPER Shares are also subject to the descriptions, limitations, and risks described above under the headings "Exchange-Traded Funds" and "Other Investment Companies." WARRANTS. Warrants are instruments that give the holder the right, but not the obligation, to buy an equity security at a specific price for a specific period of time. Changes in the value of a warrant do not necessarily correspond to changes in the value of its underlying security. The price of a warrant may be more volatile than the price of its underlying security, and a warrant may offer greater potential for capital appreciation as well as capital loss. Warrants do not entitle a holder to dividends or voting rights with respect to the underlying security and do not represent any rights in the assets of the issuing company. A warrant ceases to have value if it is not exercised prior to its expiration date. These factors can make warrants more speculative than other types of investments. WHEN-ISSUED, DELAYED-DELIVERY, AND FORWARD-COMMITMENT TRANSACTIONS. When-issued, delayed-delivery, and forward-commitment transactions involve a commitment to purchase or sell specific securities at a predetermined price or yield in which payment and delivery take place after the customary settlement period for that type of security. Typically, no interest accrues to the purchaser until the security is delivered. When purchasing securities pursuant to one of these transactions, payment for the securities is not required until the delivery date. However, the purchaser B-16 assumes the rights and risks of ownership, including the risks of price and yield fluctuations and the risk that the security will not be issued as anticipated. When a fund has sold a security pursuant to one of these transactions, the fund does not participate in further gains or losses with respect to the security. If the other party to a delayed-delivery transaction fails to deliver or pay for the securities, the fund could miss a favorable price or yield opportunity or suffer a loss. A fund may renegotiate a when-issued or forward-commitment transaction and may sell the underlying securities before delivery, which may result in capital gains or losses for the fund. When-issued, delayed-delivery, and forward-commitment transactions will not be considered to constitute the issuance of a "senior security" by a fund, and such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by the fund, if the fund covers the transaction in accordance with the requirements, and subject to the risks, described above under the heading "Borrowing." INVESTMENT LIMITATIONS Each Fund is subject to the following fundamental investment limitations, which cannot be changed in any material way without the approval of the holders of a majority of the Fund's shares. For these purposes, a "majority" of shares means shares representing the lesser of: (1) 67% or more of the Fund's net assets voted, so long as shares representing more than 50% of the Fund's net assets are present or represented by proxy; or (2) more than 50% of the Fund's net assets. BORROWING. Each Fund may borrow money for temporary or emergency purposes only in an amount not to exceed 15% of the Fund's net assets. The Fund may borrow money through banks, reverse repurchase agreements, or Vanguard's interfund lending program only, and must comply with all applicable regulatory conditions. The Fund may not make any additional investments whenever its outstanding borrowings exceed 5% of net assets. COMMODITIES. Each Fund may not invest in commodities, except that it may invest in stock futures contracts, stock options and options on stock futures contracts. No more than 5% of the Fund's total assets may be used as initial margin deposit for futures contracts, and no more than 20% of the Fund's total assets may be invested in futures contracts or options at any time. DIVERSIFICATION. With respect to 75% of its total assets, each Fund may not: (1) purchase more than 10% of the outstanding voting securities of any one issuer; or (2) purchase securities of any issuer if, as a result, more than 5% of the Fund's total assets would be invested in that issuer's securities. This limitation does not apply to obligations of the United States Government, its agencies, or instrumentalities. ILLIQUID SECURITIES. Each Fund may not acquire any security if, as a result, more than 15% of its net assets would be invested in securities that are illiquid. INDUSTRY CONCENTRATION. Each Fund may not invest more than 25% of its total assets in any one industry. INVESTING FOR CONTROL. Each Fund may not invest in a company for purposes of controlling its management. INVESTMENT OBJECTIVE. The investment objective of each Fund may not be materially changed without a shareholder vote. LOANS. Each Fund may not lend money to any person except by purchasing fixed income securities that are publicly distributed; by entering into repurchase agreements, provided, however, that repurchase agreements maturing in more than seven days, together with securities which do not have readily available market quotations, will not exceed 15% of the Fund's total assets; by lending its portfolio securities; or through Vanguard's interfund lending program. MARGIN. Each Fund may not purchase securities on margin or sell securities short, except as permitted by the Fund's investment policies relating to commodities. PLEDGING ASSETS. Each Fund may not pledge, mortgage, or hypothecate more than 15% of its net assets. REAL ESTATE. Each Fund may not invest directly in real estate, although it may invest in securities of companies that deal in real estate. SENIOR SECURITIES. Each Fund may not issue senior securities, except in compliance with the 1940 Act. UNDERWRITING. Each Fund may not engage in the business of underwriting securities issued by other persons. The Fund will not be considered an underwriter when disposing of its investment securities. B-17 Compliance with the investment limitations set forth above is measured at the time the securities are purchased. If a percentage restriction is adhered to at the time the investment is made, a later change in percentage resulting from a change in the market value of assets will not constitute a violation of such restriction. None of these limitations prevents a Fund from having an ownership interest in Vanguard. As part owner of Vanguard, each Fund may own securities issued by Vanguard, make loans to Vanguard, and contribute to Vanguard's costs or other financial requirements. See "Management of the Funds" for more information. SHARE PRICE Each Fund's share price, called its net asset value, or NAV, is calculated each business day as of the close of regular trading on the New York Stock Exchange (the Exchange), generally 4 p.m., Eastern time. NAV per share is computed by dividing the net assets allocated to each share class by the number of Fund shares outstanding for that class. The Exchange typically observes the following holidays: New Year's Day, Martin Luther King Jr. Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. Although each Fund expects the same holidays to be observed in the future, the Exchange may modify its holiday schedule or hours of operation at any time. PURCHASE AND REDEMPTION OF SHARES PURCHASE OF SHARES The purchase price of shares of each Fund is the NAV per share next determined after the purchase request is received in good order, as defined in the Funds' prospectuses. The NAV per share is calculated as of the close of regular trading on the Exchange on each day the Exchange is open for business. An order received before the close of regular trading on the Exchange will be executed at the price computed on the date of receipt; an order received after the close of regular trading on the Exchange will be executed at the price computed on the first business day following the date of receipt. REDEMPTION OF SHARES Each Fund may suspend redemption privileges or postpone the date of payment for redeemed shares (1) during any period that the Exchange is closed or trading on the Exchange is restricted as determined by the SEC, (2) during any period when an emergency exists, as defined by the SEC, as a result of which it is not reasonably practicable for the Fund to dispose of securities it owns or to fairly determine the value of its assets, and (3) for such other periods as the SEC may permit. Each Fund has made an election with the SEC to pay in cash all redemptions requested by any shareholder of record limited in amount during any 90-day period to the lesser of $250,000 or 1% of the net assets of the Fund at the beginning of such period. If Vanguard determines that it would be detrimental to the best interests of the remaining shareholders of a Fund to make payment wholly or partly in cash, the Fund may pay the redemption price in whole or in part by a distribution in kind of readily marketable securities held by the Fund in lieu of cash in conformity with applicable rules of the SEC. Investors may incur brokerage charges on the sale of such securities received in payment of redemptions. The Funds do not charge a redemption fee. Shares redeemed may be worth more or less than what was paid for them, depending on the market value of the securities held by the Fund. RIGHT TO CHANGE POLICIES Vanguard reserves the right to (1) alter, add, or discontinue any conditions of purchase, service, or privilege at any time without notice; (2) accept initial purchases by telephone; (3) freeze any account and suspend account services when Vanguard has received reasonable notice of a dispute between the registered or beneficial account owners or when we reasonably believe a fraudulent transaction may occur or has occurred; (4) alter, impose, discontinue, or waive any redemption, low-balance account, account maintenance, or other fees charged to a group of shareholders; and (5) redeem an account, without the owner's permission to do so, in cases of threatening conduct or suspicious, fraudulent, or illegal activity. Changes may affect all investors or only those in certain classes or groups. These actions will be taken B-18 when, in the sole discretion of Vanguard management, we reasonably believe they are deemed to be in the best interest of a fund. INVESTING WITH VANGUARD THROUGH OTHER FIRMS. Each Fund has authorized certain agents to accept on its behalf purchase and redemption orders, and those agents are authorized to designate other intermediaries to accept purchase and redemption orders on the Fund's behalf (collectively, Authorized Agents). A Fund will be deemed to have received a purchase or redemption order when an Authorized Agent accepts the order in accordance with the Fund's instructions. In most instances, a customer order that is properly transmitted to an Authorized Agent will be priced at the Fund's net asset value next determined after the order is received by the Authorized Agent. If you invest with Vanguard through another firm, you should review that firm's policies relating to trading in the Vanguard funds. MANAGEMENT OF THE FUNDS VANGUARD Each Fund is a member of Vanguard, which consists of more than 130 funds. Through their jointly-owned subsidiary, Vanguard, the funds obtain at cost virtually all of their corporate management, administrative, and distribution services. Vanguard also provides investment advisory services on an at-cost basis to several of the Vanguard funds including Vanguard Windsor II Fund. Vanguard employs a supporting staff of management and administrative personnel needed to provide the requisite services to the funds and also furnishes the funds with necessary office space, furnishings, and equipment. Each fund pays its share of Vanguard's total expenses, which are allocated among the funds under methods approved by the board of trustees of each fund. In addition, each fund bears its own direct expenses, such as legal, auditing, and custodian fees. The funds' officers are also officers and employees of Vanguard. Vanguard, Vanguard Marketing Corporation, the funds' advisors, and the funds have adopted Codes of Ethics designed to prevent employees who may have access to nonpublic information about the trading activities of the funds (access persons) from profiting from that information. The Codes permit access persons to invest in securities for their own accounts, including securities that may be held by a fund, but place substantive and procedural restrictions on the trading activities of access persons. For example, the Codes require that access persons receive advance approval for most securities trades to ensure that there is no conflict with the trading activities of the funds. The Codes also limit the ability of Vanguard employees to engage in short-term trading of Vanguard funds. Vanguard was established and operates under an Amended and Restated Funds' Service Agreement, which was approved by the shareholders of each of the funds. The Amended and Restated Funds' Service Agreement provides as follows: (1) each Vanguard fund may be called upon to invest up to 0.40% of its current net assets in Vanguard, and (2) there is no other limitation on the dollar amount that each Vanguard fund may contribute to Vanguard's capitalization. The amounts that each fund has invested are adjusted from time to time in order to maintain the proportionate relationship between each fund's relative net assets and its contribution to Vanguard's capital. As of October 31, 2004, the Funds contributed 0.xx% to Vanguard, which represented 0.xx% of each Fund's net assets and was x.xx% of Vanguard's capitalization. MANAGEMENT. Corporate management and administrative services include: (1) executive staff; (2) accounting and financial; (3) legal and regulatory; (4) shareholder account maintenance; (5) monitoring and control of custodian relationships; (6) shareholder reporting; and (7) review and evaluation of advisory and other services provided to the funds by third parties. DISTRIBUTION. Vanguard Marketing Corporation, a wholly-owned subsidiary of Vanguard, provides all distribution and marketing activities for the funds. The principal distribution expenses are for advertising, promotional materials, and marketing personnel. Distribution services may also include organizing and offering to the public, from time to time, one or more new investment companies. The funds' trustees review and approve the amount to be spent annually on distribution activities, as well as the manner and amount to be spent on each fund. The trustees also determine whether to organize new investment companies. B-19 One half of the distribution expenses of a marketing and promotional nature is allocated among the funds based upon their relative net assets. The remaining half of those expenses is allocated among the funds based upon each fund's sales for the preceding 24 months relative to the total sales of the funds as a group, provided, however, that no funds aggregate quarterly rate of contribution for distribution expenses of a marketing and promotional nature shall exceed 125% of the average distribution expense rate for Vanguard, and that no fund shall incur annual distribution expenses in excess of 0.20 of 1% of its average month-end net assets. During the fiscal years ended October 31, 2002, 2003, and 2004, the Funds incurred the following approximate amounts of Vanguard's management and administrative (including transfer agency), distribution, and marketing expenses: FUND ---- 2002 2003 2004 Vanguard Windsor Fund $38,198,000 $35,026,000 $xx,xxx,000 Vanguard Windsor II Fund 60,684,000 56,062,000 xx,xxx,000 Each Fund has asked its investment advisor to direct certain security trades, subject to obtaining the best price and execution, to brokers who have agreed to rebate to the Fund part of the commissions generated. Such rebates are used solely to reduce the Fund's management and administrative expenses and are not reflected in these totals. OFFICERS AND TRUSTEES The officers of the Funds manage the day-to-day operations of the Funds under the direction of the Funds' board of trustees. The trustees set broad policies for the Funds; select investment advisors; monitor fund operations, performance, and costs; nominate and select new trustees; and elect fund officers. Each trustee serves a Fund until its termination; until the trustee's retirement, resignation, or death; or as otherwise specified in the Trust's organizational documents. Any trustee may be removed at a meeting of shareholders by a vote representing two-thirds of the total net asset value of all shares of the Funds. Each trustee also serves as a director of Vanguard. The following chart shows information for each trustee and executive officer of the Funds. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482.
VANGUARD POSITION(S) FUNDS' TRUSTEE/ PRINCIPAL OCCUPATION(S) NUMBER OF VANGUARD FUNDS NAME, YEAR OF BIRTH HELD WITH FUNDS OFFICER SINCE DURING THE PAST FIVE YEARS OVERSEEN BY TRUSTEE/OFFICER - ------------------- --------------- -------------- -------------------------- --------------------------- INTERESTED TRUSTEE John J. Brennan* President, Chairman May 1987 President, 132 (1954) of the Board, Chief Officer, and Director (Trustee) of Executive Officer, Vanguard and each of the and Trustee investment companies served by Vanguard. INDEPENDENT TRUSTEES Charles D. Ellis Trustee January 2001 The Partners of '63 (pro bono ventures in 132 (1937) education); Senior Advisor to Greenwich Associates (international business strategy consulting); Successor Trustee of Yale University; Overseer of the Stern School of Business at New York University; Trustee of the Whitehead Institute for Biomedical Research. Rajiv L. Gupta Trustee December 2001 Chairman and Chief Executive Officer (since 132 (1945) October 1999 of Rohm and Haas Co. (chemicals); Director of Technitrol, Inc. (electronic components) and Agere Systems (communication components); Board Member of American Chemistry Council; Trustee of Drexel University.
*Officers of the Funds are "Interested persons" as defined in the 1940 Act. B-20
VANGUARD POSITION(S) FUNDS' TRUSTEE/ PRINCIPAL OCCUPATION(S) NUMBER OF VANGUARD FUNDS NAME, YEAR OF BIRTH HELD WITH FUNDS OFFICER SINCE DURING THE PAST FIVE YEARS OVERSEEN BY TRUSTEE/OFFICER - ------------------- --------------- -------------- -------------------------- --------------------------- JoAnn Heffernan Heisen Trustee July 1998 Vice President, Chief Information Officer, and 132 (1950) Member of the Executive Committee of Johnson & Johnson (pharmaceuticals/ consumer products); Director of the University Medical Center at Princeton and Women's Research and Education Institute. Burton G. Malkiel Trustee May 1977 Chemical Bank Chairman's Professor of Economics, 130 (1932) Princeton University; Director of Vanguard Investment Series plc (Irish investment fund) since November 2001, Vanguard Group (Ireland) Limited (investment management) since November 2001, Prudential Insurance Co. of America, BKF Capital (investment management), The Jeffrey Co. (holding company), and NeuVis, Inc. (software company). Andre F. Perold Trustee December 2004 George Gund Professor of Funance and Banking, Harvard 132 (1952) Business School (since 2000); Senior Associate Dean: Director of Faculty Recruiting, and Chair of Finance Faculty, Harvard Business School: Director and Chairman of Unx, Inc. (equities trading firm) (since 2003); Director of registered investment companies advised by Merrill Lynch Investment Managers and affiliates (1985 through 2004); Genbel Securities Limited (South African financial services firm) (1999 through 2003), Gensec Bank (1999 through 2003), Sanlam Investment Management (1999 through 2001), Sanlam, Ltd, (South African insurance company) (2001 through 2003), Stockbank, Inc. (credit card firm) (2000 through 2002), Bulldogresearch.com (investment research) (1999 through 2001); and Trustee of Commonfund (investment management) (1989 through 2001). Alfred M. Rankin, Jr. Trustee January 1993 Chairman, President, Chief Executive Officer, 132 (1941) and Director of NACCO Industries, Inc.(forklift trucks/housewares/lignite); Director of Goodrich Corporation (industrial products/ aircraft systems and services). Director of the Standard Products Company (supplier for automotive industry) until 1998. J. Lawrence Wilson Trustee April 1985 Retired Chairman and Chief Executive Officer 132 (1936) of Rohm and Haas Co. (chemicals); Director of Cummins Inc. (diesel engines), The Mead Corp. (paper products), and Amerisource Bergen Corp. (pharmaceutical distribution); Trustee of Vanderbilt University. EXECUTIVE OFFICERS R. Gregory Barton* Secretary June 2001 Managing Director and General Counsel of 132 (1951) Vanguard (since September 1997); Secretary of Vanguard and of each of the investment companies served by Vanguard (since June 2001)
*Officers of the Funds are "Interested persons" as defined in the 1940 Act. B-21
VANGUARD POSITION(S) FUNDS' TRUSTEE/ PRINCIPAL OCCUPATION(S) NUMBER OF VANGUARD FUNDS NAME, YEAR OF BIRTH HELD WITH FUNDS OFFICER SINCE DURING THE PAST FIVE YEARS OVERSEEN BY TRUSTEE/OFFICER - ------------------- --------------- -------------- -------------------------- --------------------------- Thomas J. Higgins* Treasurer July 1998 Principal of The Vanguard Group, Inc.; 132 (1957) Treasurer of each of the investment companies served by (since July 1998). *Officers of the Funds are "Interested persons" as defined in the 1940 Act.
Mr. Ellis is a Senior Advisor to Greenwich Associates, a firm that consults on business strategy to professional financial services organizations in markets around the world. A large number of financial service providers, including Vanguard, subscribe to programs of research-based consulting. During 2003 and 2004, Vanguard paid Greenwich subscription fees amounting to less than $250,000. Vanguard's subscription rates are similar to those of other subscribers. Board Committees: Each Fund's board has the following committees: - - Audit Committee: This committee oversees the accounting and financial reporting policies, the systems of internal controls, and the independent audits of each Fund and Vanguard. All independent trustees serve as members of the committee. The committee held XXX meetings during each Fund's last fiscal year. - - Compensation Committee: This committee oversees the compensation programs established by each Fund and Vanguard for the benefit of their employees, officers, and trustees/directors. All independent trustees serve as members of the committee. The committee held XXX meetings during each Fund's last fiscal year. - - Nominating Committee: This committee nominates candidates for election to Vanguard's board of directors and the board of trustees of each fund (collectively, the Vanguard boards). The committee also has the authority to recommend the removal of any director or trustee from the Vanguard boards. All independent trustees serve as members of the committee. The committee held XXX meetings during each Fund's last fiscal year. The Nominating Committee will consider shareholder recommendations for trustee nominees. Shareholders may send recommendations to Mr. Wilson, Chairman of the Committee. TRUSTEES' OWNERSHIP OF FUND SHARES All trustees allocate their investments among the various Vanguard funds based on their own investment needs. The following table shows each trustee's ownership of shares of each Fund and of all Vanguard funds served by the trustee as of December 31, 2004. As a group, the funds' trustees and officers own less than 1% of the outstanding shares of each fund.
AGGREGATE DOLLAR RANGE OF DOLLAR RANGE OF VANGUARD FUND SHARES FUND FUND SHARES OWNED BY TRUSTEE - ---- NAME OF TRUSTEE OWNED BY TRUSTEE VANGUARD WINDSOR FUND John J. Brennan Over $100,000 Over $100,000 Charles D. Ellis None Over $100,000 Rajiv L. Gupta $50,001--$100,000 Over $100,000 JoAnn Heffernan Heisen None Over $100,000 Burton G. Malkiel Over $100,000 Over $100,000 Alfred M. Rankin, Jr. $50,001--$100,000 Over $100,000 J. Lawrence Wilson None Over $100,000 VANGUARD WINDSOR II FUND John J. Brennan $1--$10,000 Over $100,000 Charles D. Ellis None Over $100,000 Rajiv L. Gupta None Over $100,000 JoAnn Heffernan Heisen None Over $100,000 Burton G. Malkiel None Over $100,000 Alfred M. Rankin, Jr. $10,001--$50,000 Over $100,000 J. Lawrence Wilson None Over $100,000
B-22 TRUSTEE COMPENSATION The same individuals serve as trustees of all Vanguard funds (with one exception, which is noted in the table on page B-xx), and each fund pays a proportionate share of the trustees' compensation. The funds also employ their officers on a shared basis; however, officers are compensated by Vanguard, not the funds. INDEPENDENT TRUSTEES. The funds compensate their independent trustees (i.e., the ones who are not also officers of the funds) in three ways: - - The independent trustees receive an annual fee for their service to the funds, which is subject to reduction based on absences from scheduled board meetings. - - The independent trustees are reimbursed for the travel and other expenses that they incur in attending board meetings. - - Upon retirement (after attaining age 65 and completing five years of service), the independent trustees who began their service prior to January 1, 2001, receive a retirement benefit under a separate account arrangement. As of January 1, 2001, the opening balance of each eligible trustee's separate account was generally equal to the net present value of the benefits he or she had accrued under the trustees' former retirement plan. Each eligible trustee's separate account will be credited annually with interest at a rate of 7.5% until the trustee receives his or her final distribution. Those independent trustees who began their service on or after January 1, 2001, are not eligible to participate in the plan. "INTERESTED" TRUSTEE. Mr. Brennan serves as a trustee, but is not paid in this capacity. He is, however, paid in his role as officer of Vanguard. COMPENSATION TABLE. The following table provides compensation details for each of the trustees. We list the amounts paid as compensation and accrued as retirement benefits by the Funds for each trustee. In addition, the table shows the total amount of benefits that we expect each trustee to receive from all Vanguard funds upon retirement, and the total amount of compensation paid to each trustee by all Vanguard funds. VANGUARD WINDSOR FUNDS TRUSTEES' COMPENSATION TABLE
PENSION OR RETIREMENT AGGREGATE BENEFITS ACCRUED ACCRUED ANNUAL TOTAL COMPENSATION COMPENSATION AS PART OF THESE RETIREMENT BENEFITS FROM ALL VANGUARD NAME OF TRUSTEE FROM THESE FUNDS(1) FUNDS' EXPENSES(1) AT JANUARY 1, 2003(2) FUNDS PAID TO TRUSTEE(3) - ------------------------------------------------------------------------------------------------------------------------------ John J. Brennan None None None None Charles D. Ellis $x,xxx N/A N/A $xxx,000 Rajiv L. Gupta x,xxx N/A N/A xxx,000 JoAnn Heffernan Heisen x,xxx $xxx $x,xxx xxx,000 Burton G. Malkiel x,xxx xxx x,xxx xxx,000 Alfred M. Rankin, Jr. x,xxx xxx x,xxx xxx,000 J. Lawrence Wilson x,xxx xxx x,xxx xxx,000 - ---------
(1)The amounts shown in this column are based on the Funds' fiscal year ended October 31, 2004. Each Fund within the Trust is responsible for a proportionate share of these amounts. (2)Each trustee is eligible to receive retirement benefits only after completing at least 5 years (60 consecutive months) of service as a trustee for the Vanguard funds. The annual retirement benefit will be paid in monthly installments, beginning with the month following the trustee's retirement from service, and will cease after 10 years of payments (120 monthly installments). Trustees who began their service on or after January 1, 2001, are not eligible to participate in the retirement benefit plan. (3)The amounts reported in this column reflect the total compensation paid to each trustee for his or her service as trustee of 132 Vanguard funds (129 in the case of Mr. Malkiel) for the 2004 calendar year. B-23 PORTFOLIO HOLDINGS DISCLOSURE POLICIES AND PROCEDURES INTRODUCTION Vanguard and the Boards of Trustees of the Vanguard funds (Boards) have adopted Portfolio Holdings Disclosure Policies and Procedures (Polices and Procedures) to govern the disclosure of the portfolio holdings of a Vanguard fund. Vanguard and the Boards considered each of the circumstances under which Vanguard fund portfolio holdings may be disclosed to different categories of persons under the Policies and Procedures. Vanguard and the Boards also considered actual and potential material conflicts that could arise in such circumstances between the interests of Vanguard fund shareholders, on the one hand, and those of the fund's investment advisor, distributor, or any affiliated person of the fund, its investment advisor, or its distributor, on the other. After giving due consideration to such matters and after the exercise of their fiduciary duties and reasonable business judgment, Vanguard and the Boards determined that the Vanguard funds have a legitimate business purpose for disclosing portfolio holdings to the persons described in each of the circumstances set forth in the Policies and Procedures and that the Policies and Procedures are reasonably designed to ensure that disclosure of portfolio holdings and information about portfolio holdings is in the best interests of fund shareholders and appropriately address the potential for material conflicts of interest. The Boards exercise continuing oversight of the disclosure of Vanguard fund portfolio holdings by (1) overseeing the implementation and enforcement of the Policies and Procedures, the Code of Ethics, and the Policies and Procedures Designed to Prevent the Misuse of Inside Information (collectively, the portfolio holdings governing policies) by the Chief Compliance Officer of Vanguard and the Vanguard funds, (2) considering reports and recommendations by the Chief Compliance Officer concerning any material compliance matters (as defined in Rule 38a-1 under the Investment Company Act and Rule 206(4)-7 under the Investment Advisers Act of 1940) that may arise in connection with any portfolio holdings governing policies, and (3) considering whether to approve or ratify any amendment to any portfolio holdings governing policies. Vanguard and the Boards reserve the right to amend the Policies and Procedures at any time and from time to time without prior notice in their sole discretion. For purposes of the Policies and Procedures, the term "portfolio holdings" means the equity and debt securities (e.g., stocks and bonds) held by a Vanguard fund and do not mean the cash investments, derivatives and other investment positions (collectively, other investment positions) held by the fund. ONLINE DISCLOSURE OF TEN LARGEST STOCK HOLDINGS Each of the Vanguard equity funds and Vanguard balanced funds generally will seek to disclose their ten largest stock portfolio holdings and the percentages that each of these ten largest stock portfolio holdings represent of the fund's total assets (collectively, "ten largest stock holdings") as of the most recent calendar-quarter end online at www.vanguard.com in the "Holdings" section of the fund's Profile page, 15 calendar days after the end of the calendar quarter. Online disclosure of the ten largest stock holdings is made to all categories of persons, including individual investors, institutional investors, intermediaries, third-party service providers, rating and ranking organizations, affiliated persons of a Vanguard fund and all other persons. ONLINE DISCLOSURE OF COMPLETE PORTFOLIO HOLDINGS Each of the Vanguard funds, excluding Vanguard money market funds, will seek to disclose their complete portfolio holdings ("complete portfolio holdings") as of the most recent calendar-quarter end online at www.vanguard.com in the "Holdings" section of the fund's Profile page, 30 calendar days after the end of the calendar quarter. Online disclosure of complete portfolio holdings is made to all categories of persons, including individual investors, institutional investors, intermediaries, third-party service providers, rating and ranking organizations, affiliated persons of a Vanguard fund and all other persons. Vanguard's Portfolio Review Department will review complete portfolio holdings before online disclosure is made as described above and, after consultation with a Vanguard fund's investment advisor, may withhold any portion of the fund's complete portfolio holdings from online disclosure as described above when deemed to be in the best interests of the fund. DISCLOSURE OF COMPLETE PORTFOLIO HOLDINGS TO SERVICE PROVIDERS SUBJECT TO CONFIDENTIALITY AND B-24 TRADING RESTRICTIONS Vanguard, for legitimate business purposes, may disclose Vanguard fund complete portfolio holdings at times it deems necessary and appropriate to rating and ranking organizations, financial printers, proxy voting service providers, pricing information vendors, third-parties that deliver analytical, statistical or consulting services and other third parties that provide services (collectively, "Service Providers") to Vanguard, Vanguard subsidiaries and/or the Vanguard funds. Disclosure of complete portfolio holdings to a Service Provider is conditioned on the Service Provider being subject to a duty of confidentiality, including a duty not to trade on the basis of any material nonpublic information. The frequency with which complete portfolio holdings may be disclosed to a Service Provider, and the length of the lag, if any, between the date of the information and the date on which the information is disclosed to the Service Provider, is determined based on the facts and circumstances, including, without limitation, the nature of the portfolio holdings information to be disclosed, the risk of harm to the funds and their shareholders, and the legitimate business purposes served by such disclosure. Disclosure of Vanguard fund complete portfolio holdings to a Service Provider must be authorized by a Vanguard fund officer or a Principal in Vanguard's Portfolio Review or Legal Departments. Any disclosure of Vanguard fund complete portfolio holdings to a Service Provider as described above may also include a list of the other investment positions comprising the fund, such as cash investments and derivatives. As of [DATE], Vanguard fund complete portfolio holdings are disclosed to the following Service Providers as part of ongoing arrangements that serve legitimate business purposes: [LIST OF SERVICE PROVIDERS TO BE ADDED BY AMENDMENT]. DISCLOSURE OF COMPLETE PORTFOLIO HOLDINGS TO VANGUARD AFFILIATES AND CERTAIN FIDUCIARIES SUBJECT TO CONFIDENTIALITY AND TRADING RESTRICTIONS Vanguard fund complete portfolio holdings may be disclosed between and among the following persons (collectively, "Affiliates and Fiduciaries") for legitimate business purposes within the scope of their official duties and responsibilities, subject to such persons' continuing duty of confidentiality and duty not to trade on the basis of any material nonpublic information, as such duties are imposed under the Code of Ethics, the Policies and Procedures Designed to Prevent the Misuse of Inside Information, by agreement or under applicable laws, rules and regulations: (1) persons who are subject to the Code of Ethics or the Policies and Procedures Designed to Prevent the Misuse of Inside Information; (2) an investment advisor, distributor, administrator, transfer agent or custodian to a Vanguard fund; (3) an accounting firm, an auditing firm or outside legal counsel retained by Vanguard, a Vanguard subsidiary or a Vanguard fund; (4) an investment advisor to whom complete portfolio holdings are disclosed for due diligence purposes when the adviser is in merger or acquisition talks with a Vanguard fund's current adviser; and (5) a newly hired investment advisor or sub-adviser to whom complete portfolio holdings are disclosed prior to the time it commences its duties. The frequency with which complete portfolio holdings may be disclosed between and among Affiliates and Fiduciaries, and the length of the lag, if any, between the date of the information and the date on which the information is disclosed between and among the Affiliates and Fiduciaries, is determined by such Affiliates and Fiduciaries based on the facts and circumstances, including, without limitation, the nature of the portfolio holdings information to be disclosed, and the risk of harm to the funds and their shareholders, an the legitimate business purposes served by such disclosure. Any disclosure of Vanguard fund complete portfolio holdings to any Affiliates and Fiduciaries as described above may also include a list of the other investment positions comprising the fund, such as cash investments and derivatives. DISCLOSURE OF PORTFOLIO HOLDINGS TO BROKER-DEALERS IN THE NORMAL COURSE OF MANAGING A FUND'S ASSETS An investment advisor, administrator or custodian for a Vanguard fund may, for legitimate business purposes within the scope of their official duties and responsibilities, disclose portfolio holdings (whether partial portfolio holdings or complete portfolio holdings) and other investment positions comprising the fund to one or more broker-dealers during the course of, or in connection with, normal day-to-day securities and derivatives transactions with or through such broker-dealers subject to the broker-dealer's legal obligation not to use or disclose material nonpublic information concerning the funds' portfolio holdings, other investment positions, securities transactions or derivatives transactions without the consent of the funds' or their agents. The Vanguard funds have not given their consent to any such use or disclosure and no person or agent of Vanguard is authorized to give such consent except as approved in writing by the fund Boards. B-25 DISCLOSURE OF NON-MATERIAL INFORMATION The Policies and Procedures permit Vanguard fund officers, Vanguard fund portfolio managers, and other Vanguard representatives (collectively, "Approved Vanguard Representatives") to disclose any views, opinions, judgments, advice or commentary, or any analytical, statistical, performance or other information, in connection with or relating to a Vanguard fund or its portfolio holdings and/or other investment positions (collectively, commentary and analysis) or any changes in the portfolio holdings of a Vanguard fund that occurred after the most recent calendar-quarter end (recent portfolio changes) to any person if (1) such disclosure serves a legitimate business purpose, (2) such disclosure does not effectively result in the disclosure of the complete portfolio holdings of any Vanguard fund (which can be disclosed only in accordance with the Policies and Procedures), and (3) such information does not constitute material nonpublic information. An Approved Vanguard Representative must make a good faith determination whether the information constitutes material nonpublic information, which involves an assessment of the particular facts and circumstances. Vanguard believes that in most cases recent portfolio changes that involve a few or even several securities in a diversified portfolio or commentary and analysis would be immaterial and would not convey any advantage to a recipient in making an investment decision concerning a Vanguard fund. Nonexclusive examples of commentary and analysis about a Vanguard fund include (1) the allocation of the fund's portfolio holdings and other investment positions among various asset classes, sectors, industries and countries, (2) the characteristics of the stock and bond components of the fund's portfolio holdings and other investment positions, (3) the attribution of fund returns by asset class, sector, industry and country, and (4) the volatility characteristics of the fund. An Approved Vanguard Representative may in its sole discretion determine whether to deny any request for information made by any person, and may do so for any reason or no reason. "Approved Vanguard Representatives" include, for purposes of the Policies and Procedures, persons employed by or associated with Vanguard or a subsidiary of Vanguard who have been authorized by Vanguard's Portfolio Review Department to disclose recent portfolio changes and/or commentary and analysis in accordance with the Policies and Procedures. DISCLOSURE OF PORTFOLIO HOLDINGS AS REQUIRED BY APPLICABLE LAW Vanguard fund portfolio holdings (whether partial portfolio holdings or complete portfolio holdings) and other investment positions comprising a fund shall be disclosed to any person as required by applicable laws, rules and regulations. Examples of such required disclosure include, but are not limited to, disclosure of Vanguard fund portfolio holdings (1) in a filing or submission with the SEC or another regulatory body, (2) in connection with seeking recovery on defaulted bonds in a federal bankruptcy case, (3) in connection with a lawsuit or (4) as required by court order. PROHIBITIONS ON DISCLOSURE OF PORTFOLIO HOLDINGS No person is authorized to disclose Vanguard fund portfolio holdings or other investment positions (whether online at www.vanguard.com, in writing, by fax, by e-mail, orally or by other means) except in accordance with the Policies and Procedures. In addition, no person is authorized to make disclosure pursuant to the Policies and Procedures if such disclosure is otherwise unlawful under the antifraud provisions of the federal securities laws (as defined in Rule 38a-1 under the Investment Company Act). Furthermore, Vanguard's management, in its sole discretion, may determine not to disclose portfolio holdings or other investment positions comprising a Vanguard fund to any person who would otherwise be eligible to receive such information under the Policies and Procedures, or may determine to make such disclosures publicly as provided by the Policies and Procedures. PROHIBITIONS ON RECEIPT OF COMPENSATION OR OTHER CONSIDERATION The Policies and Procedures prohibit a Vanguard fund, its investment advisor and any other person to pay or receive any compensation or other consideration of any type for the purpose of obtaining disclosure of Vanguard fund portfolio holdings or other investment positions. "Consideration" includes any agreement to maintain assets in the fund or in other investment companies or accounts managed by the investment advisor or by any affiliated person of the investment advisor. B-26 INVESTMENT ADVISORY SERVICES VANGUARD WINDSOR FUND The Fund employs a multimanager approach, using two primary investment advisors to manage the bulk of its assets. All of the Fund's advisors discharge their responsibilities subject to the supervision and oversight of the trustees and officers of the Fund. WELLINGTON MANAGEMENT COMPANY, LLP Vanguard Windsor Fund has entered into an investment advisory agreement with Wellington Management Company, LLP (Wellington Management) to manage a portion of the Fund's assets. Wellington Management is a Massachusetts limited liability partnership, and the following persons serve as managing partners of Wellington Management: Laurie A. Gabriel, Duncan M. McFarland, and John R. Ryan. Wellington Management and its predecessor organizations have provided investment advisory services to investment companies since 1928 and to investment counseling clients since 1960. Vanguard Windsor Fund pays Wellington Management a basic fee at the end of each fiscal quarter, calculated by applying a quarterly rate, based on the following annual percentage rates, to Vanguard Windsor Fund's average month-end net assets managed by Wellington Management (the Wellington Management Portfolio) for the quarter: NET ASSETS ANNUAL RATE - ---------- ----------- First $17.5 billion............. 0.125% Assets in excess of $17.5 billion 0.100% The basic fee paid to Wellington Management may be increased or decreased by applying an adjustment formula based on investment performance of the Wellington Management Portfolio. Such formula provides for an increase or decrease in the basic fee paid to Wellington Management each quarter, depending upon the Wellington Management Portfolio's investment performance for the 36 months preceding the end of the quarter relative to the investment record of the Standard & Poor's 500 Composite Stock Price Index (the Index) for the same period. The basic fee, as provided above, shall be increased or decreased by applying a performance fee adjustment based on the investment performance of the Wellington Management Portfolio relative to the investment performance of the Index. The following table sets forth the adjustment factors to the basic fee payable by the Fund to Wellington Management under this investment advisory agreement. For the first $17.5 billion of assets: CUMULATIVE 36-MONTH PERFORMANCE FEE PERFORMANCE VERSUS THE INDEX ADJUSTMENT - ---------------------------- * Less than -12%............. -0.67 x Basic Fee Between -12% and -6%....... -0.33 x Basic Fee Between -6% and +6%........ 0.00 x Basic Fee Between +6% and +12%....... +0.33 x Basic Fee More than +12%............. +0.67 x Basic Fee For assets over $17.5 billion: CUMULATIVE 36-MONTH PERFORMANCE FEE PERFORMANCE VERSUS THE INDEX ADJUSTMENT - ---------------------------- * Less than -12%............. -0.90 x Basic Fee Between -12% and -6%....... -0.45 x Basic Fee Between -6% and +6%........ 0.00 x Basic Fee Between +6% and +12%....... +0.45 x Basic Fee More than +12%............. +0.90 x Basic Fee *For purposes of this calculation, the basic fee is calculated by applying the quarterly rate against average assets over the 36-month period. B-27 For purposes of performance adjustments, the investment performance of the Wellington Management Portfolio for any period is expressed as a percentage of "Wellington Management Portfolio Unit Value" at the beginning of the period. This percentage is equal to the sum of: (1) the change in the Wellington Management Portfolio Unit Value during the period; (2) the value of Vanguard Windsor Fund's cash distributions from the Wellington Management Portfolio's net investment income and realized net capital gains (whether long-term or short-term) having an ex-dividend date occurring within the period; and (3) the unit value of capital gains taxes paid or accrued during the period by Vanguard Windsor Fund for undistributed realized long-term capital gains realized from the Wellington Management Portfolio. The investment record of the Index for any period is expressed as a percentage of the Index level at the beginning of the period. This percentage is equal to the sum of (1) the change in the level of the Index during the period, and (2) the value, computed consistently with the Index, of cash distributions having an ex-dividend date occurring within the period made by companies whose securities make up the Index. During the fiscal years ended October 31, 2002, 2003, and 2004, Vanguard Windsor Fund incurred the following advisory fees owed to Wellington Management: 2002 2003 2004 Basic Fee............. $14,285,000 $12,526,000 $xx,xxx,000 Increase or Decrease for Performance Adjustment 10,006,000 9,490,000 x,xxx,000 ------------------------------------- Total................. $24,291,000 22,016,000 $xx,xxx,000 SANFORD C. BERNSTEIN & CO., LLC Vanguard Windsor Fund has entered into an investment advisory agreement with Sanford C. Bernstein & Co., LLC (Bernstein), a unit of Alliance Capital Management, L.P., to manage a portion of the Fund's assets. The Fund pays Bernstein a basic fee at the end of each of the Fund's fiscal quarters, calculated by applying a quarterly rate, based on the following annual percentage rates, to the average month-end net assets managed by Bernstein (the Bernstein Portfolio) for the quarter: NET ASSETS ANNUAL RATE - ---------- ----------- First $1 billion............. 0.15% Next $2 billion.............. 0.14% Next $2 billion.............. 0.12% Assets in excess of $5 billion 0.10% The basic fee, as provided above, will be increased or decreased by the amount of a performance fee adjustment. The adjustment will be calculated as a percentage of the basic fee and will change proportionately with the investment performance of the Bernstein Portfolio relative to the investment performance of the Russell 1000 Value Index (the Index) for the 36-month period ending with the applicable quarter. The adjustment applies as follows: CUMULATIVE 36-MONTH PERFORMANCE FEE ADJUSTMENT AS A PERFORMANCE VERSUS THE INDEX PERCENTAGE OF BASIC FEE - ---------------------------- * Trails by 9% or more ............ -50% Trails by less than 9% up to and Linear decrease from 0 to -50% including 0%.................... Exceeds by more than 0% but less Linear increase from 0 to +50% than 9%......................... Exceeds by 9% or more........... +50% *For purposes of this calculation, the basic fee is calculated by applying the quarterly rate against the average net assets over the same time period which the performance is measured. The investment performance of the Bernstein Portfolio for any period, expressed as a percentage of the "Bernstein Portfolio unit value" at the beginning of such period, will be the sum of: (1) the change in the Bernstein Portfolio unit value during such period; (2) the unit value of the Fund's cash distributions from the Bernstein Portfolio's net investment income and realized net capital gains (whether long-term or short-term) having an ex-dividend date occurring within such period; and (3) the unit value of capital gains taxes paid or accrued during such period by the Fund for undistributed long- B-28 term capital gains realized by the Bernstein Portfolio. For this purpose, the unit value of distributions per share of realized capital gains, of dividends per share paid from investment income, and of capital gains taxes per share paid or payable on undistributed realized long-term gains shall be treated as reinvested in the Bernstein Portfolio at the unit value in effect at the close of business on the record date for the payment of such distributions and dividends and the date on which provision is made for such taxes, after giving effect to such distributions, dividends, and taxes. The "Bernstein Portfolio unit value" will be determined by dividing the total net assets of the Bernstein Portfolio by a given number of units. The number of units in the Bernstein Portfolio initially will be equal to the total shares outstanding of the Fund on August 1, 1999. Subsequently, as assets are added to or withdrawn from the Bernstein Portfolio, the number of units of the Bernstein Portfolio will be adjusted based on the unit value of the Bernstein Portfolio on the day such changes are executed. The investment record of the Index for any period, expressed as a percentage of the Index at the beginning of such period, will be the sum of: (1) the change in the level of the Index during such period, and (2) the value, computed consistently with the Index, of cash distributions having accumulated to the end of such period made by companies whose securities make up the Index. For this purpose, cash distributions on the securities which make up the Index will be treated as reinvested in the Index at least as frequently as the end of each calendar quarter following the payment of the dividend. The calculation will be gross of applicable costs and expenses. During the fiscal years ended October 31, 2002, 2003, and 2004, Vanguard Windsor Fund incurred the following advisory fees owed to Bernstein: 2002 2003 2004 Basic Fee........................ $5,617,000 $5,466,000 $x,xxx,000 Increase or Decrease for Performance Adjustment....................... 2,561,000 2,694,000 x,xxx,000 ------------------------------------- Total............................ $8,178,000 $8,160,000 $x,xxx,000 VANGUARD WINDSOR II FUND Vanguard Windsor II Fund employs a multimanager approach utilizing five investment advisors, each of which discharges its responsibilities subject to the supervision and oversight of the officers and trustees of the Fund. Under the investment advisory agreements, each advisor manages the investment and reinvestment of the designated assets and continuously reviews, supervises, and administers the investment program of Vanguard Windsor II Fund with respect to those assets. BARROW, HANLEY, MEWHINNEY & STRAUSS, INC. Vanguard Windsor II Fund has entered into an investment advisory agreement with Barrow, Hanley, Mewhinney & Strauss, Inc. (Barrow, Hanley) to manage a portion of the Fund's assets. Barrow, Hanley, a Nevada Corporation, is an investment management firm founded in 1979 which provides investment advisory services to individuals, employee benefit plans, investment companies, and other institutions. Barrow, Hanley is a subsidiary of Old Mutual Asset Managers (US) LLC, which is a subsidiary of Old Mutual plc, based in London, England. Vanguard Windsor II Fund pays Barrow, Hanley a basic fee at the end of each fiscal quarter, calculated by applying a quarterly rate, based on the following annual percentage rates, to the average month-end net assets of Vanguard Windsor II Fund managed by Barrow, Hanley for the quarter: NET ASSETS ANNUAL RATE - ---------- ----------- First $200 million.... 0.300% Next $300 million..... 0.200% Next $500 million..... 0.150% Over $1 billion....... 0.125% B-29 The Fund's payments to Barrow, Hanley under the above schedule are subject to a performance fee arrangement which compares the performance of the Fund's assets managed by Barrow, Hanley with the performance of the Standard & Poor's 500/Barra Value Index (the Barra Value Index). This arrangement provides for the following adjustments to Barrow, Hanley's basic fee: CUMULATIVE 36-MONTH PERFORMANCE FEE PERFORMANCE VERSUS THE INDEX ADJUSTMENT - ---------------------------- * Trails by -9% or more............ -0.25 x Basic Fee Trails by more than -6% but less than -9% -0.15 x Basic Fee Trails/exceeds from -6% through +6% 0.00 x Basic Fee Exceeds by more than +6% but less than +9% +0.15 x Basic Fee Exceeds by +9% or more........... +0.25 x Basic Fee *For purposes of the performance fee calculation, the basic fee is calculated by applying the quarterly rate against average net assets managed by Barrow, Hanley over the same period for which performance is measured. The Barra Value Index includes stocks in the Standard & Poor's 500 Composite Stock Price Index with lower than average ratios of market price to book value. These types of stocks are often referred to as "value" stocks. The investment performance of the portion of Vanguard Windsor II Fund's assets managed by Barrow, Hanley (the Barrow, Hanley Portfolio) for any period is expressed as a percentage of the "Barrow, Hanley Portfolio Unit Value" at the beginning of such period. This percentage is equal to the sum of: (1) the change in the Barrow, Hanley Portfolio Unit Value during such period; (2) the unit value of the Fund's cash distributions from the Barrow, Hanley Portfolio's net investment income and realized net capital gains (whether long-term or short-term) having an ex-dividend date occurring within such period; and (3) the unit value of capital gains taxes per share paid or accrued on undistributed realized long-term capital gains accumulated to the end of the period by the Barrow, Hanley Portfolio, expressed as a percentage of the Barrow, Hanley Portfolio Unit Value at the beginning of such period. The Barrow, Hanley Portfolio Unit Value will be determined by dividing the total net assets of the Barrow, Hanley Portfolio by a given number of units. On the initial date of the agreement, the number of units in the Barrow, Hanley Portfolio was equal to the total shares outstanding of Vanguard Windsor II Fund. After such initial date, as assets are added to or withdrawn from the Barrow, Hanley Portfolio, the number of units of the Barrow, Hanley Portfolio will be adjusted based on the unit value of the Barrow, Hanley Portfolio on the day such changes are executed. The investment record of the Barra Value Index for any period, expressed as a percentage of the Index level at the beginning of such period, will be the sum of (1) the change in the level of the Index during such period, and (2) the value, computed consistently with the Index, of cash distributions having an ex-dividend date occurring within such period made by companies whose securities make up the Index. During the fiscal years ended October 31, 2002, 2003, and 2004, Vanguard Windsor II Fund incurred the following advisory fees owed to Barrow, Hanley: 2002 2003 2004 ---- ---- ---- Basic Fee............. $18,824,000 17,580,000 xx,xxx,000 Increase or Decrease for Performance Adjustment............ 3,246,000 4,721,000 xx,xxx,000 -------------------------------------------- Total................. 22,070,000 22,301,000 xx,xxx,000 EQUINOX CAPITAL MANAGEMENT, LLC Vanguard Windsor II Fund has entered into an investment advisory agreement with Equinox Capital Management, LLC (Equinox) to manage a portion of the Fund's assets. Equinox is a Delaware Limited Liability Company controlled by the following officers of Equinox: Ronald J. Ulrich, Chairman and Chief Investment Officer; and Wendy D. Lee, Chief Executive Officer. B-30 Under the terms of an investment advisory agreement, Vanguard Windsor II Fund pays Equinox a basic fee at the end of each fiscal quarter, calculated by applying a quarterly rate, based on the following annual percentage rates, to the portion of Vanguard Windsor II Fund's average month-end net assets managed by Equinox for the quarter: NET ASSETS ANNUAL RATE - ---------- ----------- First $400 million........... 0.200% Next $600 million............ 0.150% Next $1 billion.............. 0.125% Assets in excess of $2 billion 0.100% The basic fee paid to Equinox may be increased or decreased by applying an adjustment formula based on the investment performance of the portion of Vanguard Windsor II Fund's assets managed by Equinox (the Equinox Portfolio) relative to the investment performance of the Russell 1000 Value Index (the Index). Such formula provides for an increase or decrease in the basic fee paid to Equinox each quarter, depending upon the Equinox Portfolio's investment performance for the 36 months preceding the end of the quarter. The following table sets forth the adjustment factors to the basic fee payable by the Equinox Portfolio to Equinox under this investment advisory agreement: CUMULATIVE 36-MONTH PERFORMANCE FEE PERFORMANCE VERSUS THE INDEX ADJUSTMENT - ---------------------------- * Less than -9%.............. -0.50 x Basic Fee Between -9% and -4.5%...... -0.25 x Basic Fee Between -4.5% and +4.5%.... 0.00 x Basic Fee Between +4.5% and +9%...... +0.25 x Basic Fee More than +9%.............. +0.50 x Basic Fee *For purposes of this calculation, the basic fee is calculated by applying the quarterly rate against average assets over the 36-month period. The investment performance of the Equinox Portfolio for such period, expressed as a percentage of the Equinox Portfolio's net asset value per share at the beginning of such period, shall be the sum of: (1) the change in the Equinox Portfolio's net asset value per share during such period; (2) the value of Equinox Portfolio's cash distributions per share having an ex-dividend date occurring within such period; and (3) the per share amount of capital gains taxes paid or accrued during such period by the Equinox Portfolio for undistributed realized long-term capital gains. The investment record of the Index for any period, expressed as a percentage of the Index at the beginning of such period, shall be the sum of (1) the change in the level of the Index during such period and (2) the value, computed consistently with the Index, of cash distributions having an ex-dividend date occurring within such period made by companies whose securities make up the Index. During the fiscal years ended October 31, 2002, 2003, and 2004, Vanguard Windsor II Fund incurred the following advisory fees owed to Equinox: 2002 2003 2004 ---- ---- ---- Basic Fee........................ $ 4,427,000 $4,076,000 $x,xxx,000 Increase or Decrease for Performance Adjustment....................... (887,000) (1,951,000) x,xxx,000 -------------------------------------- Total............................ $3,540,000 $2,125,000 $x,xxx,000 HOTCHKIS AND WILEY CAPITAL MANAGEMENT, LLC Vanguard Windsor II Fund has entered into an investment advisory agreement with Hotchkis and Wiley Capital Management, LLC (Hotchkis & Wiley), to manage a portion of the Fund's assets. Hotchkis & Wiley is a Delaware limited liability company, the primary members of which are HWCap Holdings, a limited liability company whose members are employees of Hotchkis & Wiley, and Stephens-H&W, a limited liability company whose primary member is Stephens Group Inc., which is a diversified holding company. B-31 The Windsor II Fund pays Hotchkis & Wiley a base fee at the end of each fiscal quarter. The base fee is calculated by applying a quarterly rate, based on the following annual percentage rates, to the average month-end assets of the portion of Vanguard Windsor II Fund's assets managed by Hotchkis & Wiley (the H&W Portfolio), and dividing the result by four: NET ASSETS ANNUAL RATE - ---------- ----------- First $1.5 billion.... 0.150% Next $3.5 billion..... 0.125% Over $5 billion....... 0.100% The base fee, as provided above, will be increased or decreased by the amount of a performance fee adjustment. The performance fee adjustment will be calculated as a percentage of the base fee and will change proportionately with the investment performance of the H&W Portfolio relative to the investment performance of the MSCI US Investable Market 2500 Index (the Index) for the 60-month period ending with the applicable quarter. The performance fee adjustment applies as follows: CUMULATIVE 60-MONTH PERFORMANCE FEE PERFORMANCE VERSUS THE INDEX ADJUSTMENT - ---------------------------- Trails by more than -15%......... -50% Trails by -15% up to and including 0% Linear decrease from -50% to 0% Exceeds by more than 0% up to and including Linear increase from 0% to +50% +15% Exceeds by more than +15% +50% The investment performance of the H&W Portfolio for any period is expressed as a percentage of the "H&W Portfolio Unit Value" at the beginning of such period. The percentage is equal to the sum of: (1) the change in the H&W Portfolio Unit Value during such period; (2) the unit value of Vanguard Windsor II Fund's cash distributions from the H&W Portfolio's net investment income and realized net capital gains (whether long-term or short-term) having an ex-dividend date occurring within such period; and (3) the unit value of capital gains taxes paid or accrued during such period by Vanguard Windsor II Fund for undistributed realized long-term capital gains realized from the H&W Portfolio. The H&W Portfolio Unit Value will be determined by dividing the total net assets of the H&W Portfolio by a given number of units. On the initial date of the agreement, the number of units in the H&W Portfolio was equal to the total shares outstanding of Vanguard Windsor II Fund. After the initial date, as assets are added to or withdrawn from the H&W Portfolio, the number of units of the H&W Portfolio will be adjusted based on the unit value of the H&W Portfolio on the day such changes are executed. The investment record of the Index for any period, expressed as a percentage of the Index level at the beginning of the period, will be the sum of (1) the change in the level of the Index during such period, and (2) the value, computed consistently with the Index, of cash distributions having an ex-dividend date occurring within such period made by companies whose securities make up the Index. For this purpose, cash distributions on the securities that make up the Index will be treated as reinvested in the Index, at least as frequently as the end of each calendar quarter following the payment of the dividend. The calculation will be gross of applicable costs and expenses, and consistent with the methodology used by Morgan Stanley Capital International Inc. B-32 I. THE FOLLOWING EXAMPLE SERVES AS A GUIDE FOR THE CALCULATION OF THE ADJUSTED FEE. Assume the adjusted fee for the fiscal quarter ending January 31, 2009, is being calculated, the transition rules (described below) are not in effect, and the month-end net assets of the H&W Portfolio over the rolling 60-month period applicable to the quarter are as follows:
MONTH-END NET ASSETS OF H&W PORTFOLIO ($MILLION) ------------------------------------------------ JAN. FEB. MAR. APRIL MAY JUNE JULY AUG. SEPT. OCT. NOV. DEC. 2004 1,001 1,002 1,003 1,004 1,005 1,006 1,007 1,008 1,009 1,010 1,011 2005 1,012 1,013 1,014 1,015 1,016 1,017 1,018 1,019 1,020 1,021 1,022 1,023 2006 1,024 1,025 1,026 1,027 1,028 1,029 1,030 1,031 1,032 1,033 1,034 1,035 2007 1,036 1,037 1,038 1,039 1,040 1,041 1,042 1,043 1,044 1,045 1,046 1,047 2008 1,048 1,049 1,050 1,051 1,052 1,053 1,054 1,055 1,056 1,057 1,058 1,059 2009 1,060
Also, assume the cumulative performance of the H&W Portfolio over the rolling 60-month period applicable to the quarter is +17.5%, and the cumulative performance of the Index over the period is +10.0%. Thus, the excess return of the H&W Portfolio over the applicable period is +7.5%. The adjusted fee payable by the Fund to the advisor for the quarter ending January 31, 2009, would be $493,734.38, calculated as follows: 1. A BASE FEE OF $397,125.00, WHICH IS CALCULATED AS FOLLOWS. The average month-end net assets of the H&W Portfolio over the quarter ending January 31, 2009 ($1,059,000,000), are multiplied by the annual percentage rate (0.15%), and divided by four. Therefore, the base fee is equal to: BASE FEE = (A X B) / 4 Where: a =average month-end net assets over the quarter ending January 31, 2009, calculated as follows: ($1,058,000,000 + $1,059,000,000 + $1,060,000,000) / 3 = $1,059,000,000 b =annual percentage rate applied to average month-end net assets, = 0.15% Base Fee = ($1,059,000,000 X 0.15%) / 4 = $397,125.00 2. A PERFORMANCE ADJUSTMENT OF +$96,609.38, WHICH IS CALCULATED AS FOLLOWS. The average month-end net assets of the H&W Portfolio over the rolling 60-month period applicable to the quarter ending January 31, 2009, are $1,030,500,000. The excess return of the H&W Portfolio (+17.5%) over the Index (+10.0%) over such period is +7.5%. An excess return of +7.5%, when applied to the performance adjustment schedule, corresponds to an adjustment percentage of +25%, calculated as follows: ADJUSTMENT PERCENTAGE = [(C / D) X E] Where: c =excess return over the performance period = +7.5% d =maximum excess return for appropriate performance range = +15.0% e =maximum adjustment percentage for appropriate performance range = +50% Adjustment Percentage = [(7.5% / 15.0%) x 50%] = +25% THEREFORE, THE PERFORMANCE ADJUSTMENT = [(F X G) X H] / 4 Where: f =adjustment percentage = +25% g =annual percentage rate applied to average month end net assets = 0.15% h =average month-end net assets for the 60 months ended January 31, 2009 = $1,030,500,000 Performance Adjustment = [(25% x 0.15%) x $1,030,500,000] / 4 = +$96,609.38 B-33 3. AN ADJUSTED FEE OF $493,734.38, WHICH IS CALCULATED AS FOLLOWS: ADJUSTED FEE = I + J Where: i =base fee = $397,125.00 j =performance adjustment = $96,609.38 Adjusted Fee = $397,125.00 + $96,609.38 = $493,734.38 4. CERTAIN CONVENTIONS. In practice, calculations will be extended to the eighth decimal point. Performance differences between the H&W Portfolio and the Index are treated in a symmetric manner, as in the example. II. THE PERFORMANCE ADJUSTMENT WILL NOT BE FULLY INCORPORATED INTO THE DETERMINATION OF THE ADJUSTED FEE UNTIL THE FISCAL QUARTER ENDED JANUARY 31, 2009. Until that date, the following transition rules will apply: 1. DECEMBER 1, 2003, THROUGH OCTOBER 31, 2004. The adjusted fee will be deemed to equal the base fee. No performance adjustment will apply to the calculation of the adjusted fee during this period. 2. NOVEMBER 1, 2004, THROUGH JANUARY 31, 2009. Beginning November 1, 2004, the performance adjustment will take effect on a progressive basis with regard to the number of months elapsed between January 31, 2004, and the end of the quarter for which the adjusted fee is being computed. During this period, the base fee for purposes of calculating the performance adjustment will be computed using the average month-end net assets of the H&W Portfolio, as determined for a period commencing February 1, 2004, and ending as of the end of the applicable quarter of the Fund. During this period, the performance adjustment will be calculated using the cumulative performance of the H&W Portfolio and the Index for a period commencing February 1, 2004, and ending as of the end of the applicable fiscal quarter of the Fund. For these purposes, the endpoints and the size of the range over which a positive or negative adjustment percentage applies and the corresponding maximum adjusted percentage will be multiplied by a time-elapsed fraction. The fraction will equal the number of months elapsed since January 31, 2004, divided by 60. 3. ON AND AFTER JANUARY 31, 2009. The adjusted fee will be equal to the base fee plus the performance adjustment. III. THE FOLLOWING EXAMPLE SERVES AS A GUIDE FOR THE CALCULATION OF THE ADJUSTED FEE DURING THE TRANSITION PERIOD. Assume that the advisor's compensation is being calculated for the fiscal quarter ended July 31, 2006, and the month-end net assets of the H&W Portfolio over the 30-month period applicable to such fiscal quarter are as follows:
MONTH-END NET ASSETS OF H&W PORTFOLIO ($MILLION) ------------------------------------------------ JAN. FEB. MAR. APRIL MAY JUNE JULY AUG. SEPT. OCT. NOV. DEC. 2004 1,001 1,002 1,003 1,004 1,005 1,006 1,007 1,008 1,009 1,010 1,011 2005 1,012 1,013 1,014 1,015 1,016 1,017 1,018 1,019 1,020 1,021 1,022 1,023 2006 1,024 1,025 1,026 1,027 1,028 1,029 1,030
Also, assume the cumulative performance of the H&W Portfolio over the 30-month period applicable to the July 31, 2006, quarter is +10.75%, and the cumulative performance of the Index over such period is +7.0%. Thus, the excess return of the H&W Portfolio over the applicable period is +3.75%. The adjusted fee payable by the Fund to the advisor for the fiscal quarter ending July 31, 2006, would be $433,476.56, calculated as follows: 1. A BASE FEE OF $385,875.00, WHICH IS CALCULATED AS FOLLOWS. The average month-end net assets of the H&W Portfolio over the fiscal quarter ending July 31, 2006 ($1,029,000,000), is multiplied by the annual percentage rate (0.15%), and divided by four. Therefore, the base fee is equal to: BASE FEE = (A X B) / 4 Where: a =average month-end net assets over the quarter ending July 31, 2006, calculated as follows: ($1,028,000,000 + $1,029,000,000 + $1,030,000,000) / 3 = $1,029,000,000 b =annual percentage rate applied to average month-end net assets = 0.15% Base Fee = ($1,029,000,000 X 0.15%) / 4 = $385,875.00 B-34 2. A PERFORMANCE ADJUSTMENT OF +$47,601.56, WHICH IS CALCULATED AS FOLLOWS. The average month-end net assets of the H&W Portfolio over the performance period (February 1, 2004, to July 31, 2006) are $1,015,500,000. The excess return of the H&W Portfolio (+10.75%) over the Index (+7.0%) over such period is +3.75%. An excess return of +3.75%, when applied to the performance adjustment schedule, corresponds to an adjustment percentage of +12.5%, calculated as follows: ADJUSTMENT PERCENTAGE = [(C / D) X K] Where: c =percentage amount by which the performance of the H&W Portfolio has exceeded the Index = +3.75% d =size of the adjusted range, determined as follows: adjusted range = [(e / f) x g] to [(e / f) x h] = [(30 / 60) x +15.0%] to [(30 / 60) x 0.0%] = (+7.5% to 0.0%) e=number of months elapsed from January 31, 2004, to July 31, 2006 = 30 f=number of months in full rolling performance period = 60 g=maximum excess return for appropriate performance range = +15.0% h=minimum excess return for appropriate performance range = 0.0% k =maximum adjustment percentage for the transition period, which is determined as follows: maximum adjustment percentage = [(e / f) x j] = [(30 / 60) x 50%)] = +25% e=number of months elapsed from January 31, 2004, to July 31, 2006 = 30 f=number of months in full rolling performance period = 60 j=maximum adjustment percentage for the appropriate performance range = +50% Adjustment Percentage = [(3.75% / 7.50%) x 25%] = +12.5% = l THEREFORE, THE PERFORMANCE ADJUSTMENT IS EQUAL TO [(L X M) X N] / 4 Where: l =adjustment percentage = +12.5% m =annual percentage rate applied to average month-end net assets = 0.15% n =average month-end net assets for the transition period ended July 31, 2006 = $1,015,500,000 Performance Adjustment = [(12.5% x 0.15%) x $1,015,500,000] / 4 = +$47,601.56 3. AN ADJUSTED FEE OF $433,476.56, WHICH IS CALCULATED AS FOLLOWS: ADJUSTED FEE = (O + P) Where: o =base fee = $385,875.00 p =performance adjustment = $47,601.56 Adjusted Fee = $385,875.00 + $47,601.56 = $433,476.56 4. CERTAIN CONVENTIONS. In practice, calculations will be extended to the eighth decimal point. Performance differences between the H&W Portfolio and the Index are treated in a symmetric manner, as in the example. TUKMAN CAPITAL MANAGEMENT, INC. Vanguard Windsor II Fund has entered into an investment advisory agreement with Tukman Capital Management, Inc. (Tukman) to manage a portion of the Fund's assets. Tukman is a Delaware corporation controlled by the following officers of Tukman: Melvin T. Tukman, President and Director; and Daniel L. Grossman, Vice President. Under the terms of an investment advisory agreement, the Fund pays Tukman a basic fee at the end of each fiscal quarter, calculated by applying a quarterly rate, based on the following annual percentage rates, to the average month-end assets of the portion of Vanguard Windsor II Fund's assets managed by Tukman: B-35 NET ASSETS ANNUAL RATE - ---------- ----------- First $25 million..... 0.400% Next $125 million..... 0.350% Next $350 million..... 0.250% Next $500 million..... 0.200% Over $1 billion....... 0.150% The Fund's payments to Tukman under the above schedule are subject to a performance fee arrangement which compares the performance of the Fund assets managed by Tukman with the performance of the Standard & Poor's 500 Composite Stock Price Index (the Index). This arrangement provides that the basic fee paid to Tukman, as provided above, shall be increased or decreased by applying an incentive/penalty fee adjustment based on the investment performance of the Tukman Portfolio relative to the investment record of the Standard and Poor's 500 Composite Stock Price Index ("S&P 500"). Such incentive/penalty fee adjustment provides for: (1) a 50% increase or decrease in the basic advisory fee if the investment performance of the Tukman Portfolio for the 36 months preceding the end of the quarter is 12 percentage points or more above or below, respectively, the investment record of the S&P 500 for the same period; or (2) a 25% increase or decrease in the basic advisory fee if the investment performance of Tukman Portfolio for such 36 months is 6 or more but less than 12 percentage points above or below, respectively, the investment record of the S&P 500 for the same period. The investment performance of the portion of Vanguard Windsor II Fund's assets managed by Tukman (the Tukman Portfolio) for any period is expressed as a percentage of the "Tukman Portfolio Unit Value" at the beginning of such period. The percentage is equal to the sum of: (1) the change in the Tukman Portfolio Unit Value during such period; (2) the unit value of Vanguard Windsor II Fund's cash distributions from the Tukman Portfolio's net investment income and realized net capital gains (whether long-term or short-term) having an ex-dividend date occurring within such period; and (3) the unit value of capital gains taxes paid or accrued during such period by Vanguard Windsor II Fund for undistributed realized long-term capital gains realized from the Tukman Portfolio. The Tukman Portfolio Unit Value will be determined by dividing the total net assets of the Tukman Portfolio by a given number of units. On the initial date of the agreement, the number of units in the Tukman Portfolio was equal to the total shares outstanding of Vanguard Windsor II Fund. After such initial date, as assets are added to or withdrawn from the Tukman Portfolio, the number of units of the Tukman Portfolio will be adjusted based on the unit value of the Tukman Portfolio on the day such changes are executed. The investment record of the Index will be calculated quarterly by (1) multiplying the total return for the quarter (change in market price plus dividends) of each stock included in the Index by its weighting in the Index at the beginning of the quarter, and (2) adding the values discussed in (1). For any period, therefore, the investment record of the Index will be the compounded quarterly returns of the Index. During the fiscal years ended October 31, 2002, 2003, and 2004, Vanguard Windsor II Fund incurred the following advisory fees owed to Tukman: 2002 2003 2004 ---- ---- ---- Basic Fee................ $5,657,000 $5,259,000 $x,xxx,000 Increase or Decrease for Performance Adjustment... 2,894,000 2,781,000 x,xxx,000 ---------------------------------- Total.................... $8,551,000 $8,040,000 $x,xxx,000 VANGUARD'S QUANTITATIVE EQUITY GROUP During the fiscal years ended October 31, 2002, 2003, and 2004, Vanguard Windsor II Fund incurred the following expenses for Vanguard's investment advisory services: $624,000, $532,000, and $xxx,000, respectively. DURATION AND TERMINATION OF INVESTMENT ADVISORY ARRANGEMENTS Each Fund's current agreement with its external advisors is renewable for successive one-year periods (the initial agreement with Hotchkis & Wiley is in effect until December 1, 2006, and renewable for successive one-year periods thereafter), only if (1) each renewal is specifically approved by a vote of the Fund's board of trustees, including the affirmative votes of a majority of the trustees who are not parties to the agreement or "interested persons" (as defined B-36 in the 1940 Act) of any such party, cast in person at a meeting called for the purpose of considering such approval, or (2) each renewal is specifically approved by a vote of a majority of the Fund's outstanding voting securities. An agreement is automatically terminated if assigned, and may be terminated without penalty at any time (1) by vote of the board of trustees of the Fund on sixty (60) days' written notice (thirty (30) days' for Hotchkis & Wiley) to the advisor, (2) by a vote of a majority of the Fund's outstanding voting securities, or (3) by the advisor upon ninety (90) days' written notice to the Fund. BOARD REVIEW OF INVESTMENT ADVISORY ARRANGEMENTS Each Fund's board of trustees oversees the Fund's management and performance on a regular basis. For the Windsor and Windsor II Funds, the board determines annually whether to approve and renew the Funds' investment advisory arrangements. For the Windsor II Fund, the board considers annually whether the Fund and its shareholders continue to benefit from the internalized management structure whereby the Fund receives investment management services at cost from Vanguard's Quantitative Equity Group. Vanguard provides the board with monthly, quarterly, and annual analyses of each advisor's performance. In addition, the investment advisors provide the board with quarterly self-evaluations and certain other information the board deems important to evaluate the short- and long-term performance of the advisors of the Windsor and Windsor II Funds, and the internalized management of the Windsor II Fund. Each Fund's portfolio managers meet with the board periodically to discuss the management and performance of the Fund. When considering whether to renew an investment advisory contract (in the case of the Windsor and Windsor II Funds), or continue the internalized management structure of the Windsor II Fund, the board examines several factors, but does not identify any particular factor as controlling their decision. Some of the factors considered by the board include: the nature, extent, and quality of the advisory services provided as well as other material facts, such as the investment performance of the Fund's assets managed by the advisor and the fair market value of the services provided. The board reviews and considers the extent to which the advisor has realized or will realize economies of scale as the Fund grows. Additional information is provided to the board detailing other sources of revenue to the advisor or its affiliates from its relationship with the Fund; intangible or "fall-out" benefits that accrue to the advisor and its affiliates, if relevant, and the advisor's control of the investment expenses of the Fund, such as transaction costs, including ways in which portfolio transactions for the Fund are conducted and brokers are selected. For the Windsor and Windsor II Funds, the board also takes into account the nature of the fee arrangements, which include breakpoints that will adjust the fee downward as the size of a Fund increases and a performance adjustment that is designed to benefit shareholders by aligning the advisor's fee with the investment returns delivered to shareholders. The board also reviews the investment performance of each Fund compared with a peer group of funds and an appropriate index or combination of indexes, in addition to a comparative analysis of expense ratios of, and advisory fees paid by, similar funds. The following table reflects a sample of the most recent data for each Fund:
AVERAGE ANNUAL RETURN (BEFORE TAXES) FOR PERIODS ENDED OCTOBER 31, 2004 ------------------------------ ADVISORY FEES EXPRESSED AS AN ANNUAL EFFECTIVE RATE OF THE FUND'S AVERAGE 1 YEAR 5 YEARS 10 YEARS EXPENSE RATIO NET ASSETS ------ ------- -------- ------------- ----------------- VANGUARD WINDSOR FUND x.xx% x.xx% x.xx% 0.xx% 0.xx% INVESTOR SHARES* Average Multi-Cap Value Fund** x.xx x.xx x.xx x.xx 0.xx Russell 1000 Value Index x.xx x.xx x.xx N/A N/A Dow Jones Wilshire 5000 Composit Index x.xx x.xx x.xx N/A N/A VANGUARD WINDSOR II FUND x.xx% x.xx% x.xx% 0.xx% 0.xx% INVESTOR SHARES* Average Large-Cap Value Fund** x.xx x.xx x.xx x.xx 0.xx Russell 1000 Value Index x.xx x.xx x.xx N/A N/A Dow Jones Wilshire 5000 Composite Index x.xx x.xx x.xx N/A N/A *Information about the Fund's Admiral Shares may be found elsewhere in this Statement of Additional Information. **Data provided by Lipper Inc.
B-37 Based upon its most recent evaluation of each Fund's investment staff, the portfolio management process, the short- and long-term performance results, the current external advisory arrangements for the Funds, and the at-cost internalized management arrangement for the Windsor II Fund, the board determined that it would be in the best interests of each Fund's shareholders to renew the existing investment advisory agreements for the Funds and to continue the internalized management arrangement for the Windsor II Fund. The primary factors underlying the board's determination to renew each Fund's advisory agreements were as follows: VANGUARD WINDSOR FUND WELLINGTON MANAGEMENT COMPANY, LLP: - - The board determined that the performance results for the portion of the Fund's assets managed by Wellington Management were reasonable as compared with relevant performance standards, include the performance results of: (a) the Standard & Poor's 500 Composite Stock Price Index for the same periods; (b) the average multi-cap value fund (derived from data provided by Lipper Inc.); and (c) other appropriate market indexes. - - The board assessed that the advisory fee paid by the Fund was reasonable based on the average advisory fee for the Fund's Lipper peer group. The board also took into account the nature of the fee arrangements which include breakpoints that will adjust the fee downward as the size of the advisor's portfolio increases and a performance adjustment that is designed to benefit shareholders by aligning the advisor's fee with the investment returns delivered to shareholders. - - The board evaluated the advisor's investment staff and portfolio management process, and reviewed the composition and overall performance of the advisor's portfolio on both a short-term and long-term basis. The board considered whether the Fund should obtain alternative portfolio management services and concluded that, under all the circumstances and based on its informed business judgement, the most appropriate course of action in the best interests of the Fund's shareholders was to renew the agreement with Wellington Management. SANFORD C. BERNSTEIN & CO., LLC - - The board determined that the performance results for the portion of the Fund's assets managed by Bernstein were reasonable, as compared with relevant performance standards, including the performance results of: (a) the Russell 1000 Value Index; (b) the average multi-cap value fund (derived from data provided by Lipper Inc.); and (c) other appropriate market indexes. - - The board assessed that the advisory fee paid by the Fund was reasonable based on the average advisory fee for the Fund's Lipper peer group. The board also took into account the nature of the fee arrangements which include breakpoints that will adjust the fee downward as the size of the advisor's portfolio increases and a performance adjustment that is designed to benefit shareholders by aligning the advisor's fee with the investment returns delivered to shareholders. - - The board evaluated the advisor's investment staff and portfolio management process, and reviewed the composition and overall performance of the advisor's portfolio on both a short-term and long-term basis. The board considered whether the Fund should obtain alternative portfolio management services and concluded that, under all the circumstances and based on its informed business judgement, the most appropriate course of action in the best interests of the Fund's shareholders was to renew the agreement with Bernstein. VANGUARD WINDSOR II FUND BARROW, HANLEY, MEWHINNEY & STRAUSS, INC.: - - The board determined that the performance results for the portion of the Fund's assets managed by Barrow, Hanley were reasonable, as compared with relevant performance standards, including the performance results of: (a) the Barra Value Index; (b) the average large-cap value fund (derived from data provided by Lipper Inc.); and (c) other appropriate market indexes. - - The board assessed that the advisory fee paid by the Fund was reasonable based on the average advisory fee for the Fund's Lipper peer group. The board also took into account the nature of the fee arrangements which include breakpoints that will adjust the fee downward as the size of the advisor's portfolio increases and a performance B-38 adjustment that is designed to benefit shareholders by aligning the advisor's fee with the investment returns delivered to shareholders. - - The board evaluated the advisor's investment staff and portfolio management process, and reviewed the composition and overall performance of the advisor's portfolio on both a short-term and long-term basis. The board considered whether the Fund should obtain alternative portfolio management services and concluded that, under all the circumstances and based on its informed business judgement, the most appropriate course of action in the best interests of the Fund's shareholders was to renew the agreement with Barrow, Hanley. EQUINOX CAPITAL MANAGEMENT, LLC - - The board determined that the performance results for the portion of the Fund's assets managed by Equinox were reasonable, as compared with relevant performance standards, including: (a) the Russell 1000 Value Index; (b) the average large-cap value fund (derived from data provided by Lipper Inc.); and (c) other appropriate market indexes. - - The board assessed that the advisory fee paid by the Fund was reasonable based on the average advisory fee for the Fund's Lipper peer group. The board also took into account the nature of the fee arrangements which include breakpoints that will adjust the fee downward as the size of the advisor's portfolio increases and a performance adjustment that is designed to benefit shareholders by aligning the advisor's fee with the investment returns delivered to shareholders. - - The board evaluated the advisor's investment staff and portfolio management process, and reviewed the composition and overall performance of the advisor's portfolio on both a short-term and long-term basis. The board considered whether the Fund should obtain alternative portfolio management services and concluded that, under all the circumstances and based on its informed business judgement, the most appropriate course of action in the best interests of the Fund's shareholders was to renew the agreement with Equinox. TUKMAN CAPITAL MANAGEMENT, INC.: - - The board determined that the performance results for the portion of the Fund's assets managed by Tukman were reasonable, as compared with relevant performance standards, including: (a) the Standard & Poor's 500 Composite Stock Price Index; (b) the average large-cap value fund (derived from data provided by Lipper Inc.); and (c) other appropriate market indexes. - - The board assessed that the advisory fee paid by the Fund was reasonable based on the average advisory fee for the Fund's Lipper peer group. The board also took into account the nature of the fee arrangements which include breakpoints that will adjust the fee downward as the size of the advisor's portfolio increases and a performance adjustment that is designed to benefit shareholders by aligning the advisor's fee with the investment returns delivered to shareholders. - - The board evaluated the advisor's investment staff and portfolio management process, and reviewed the composition and overall performance of the advisor's portfolio on both a short-term and long-term basis. The board considered whether the Fund should obtain alternative portfolio management services and concluded that, under all the circumstances and based on its informed business judgement, the most appropriate course of action in the best interests of the Fund's shareholders was to renew the agreement with Tukman. HOTCHKIS & WILEY - - The board reviewed Hotchkis & Wiley's short-term and long-term performance for similar investment mandates. - - The board decided that the advisory fee to be paid by the Fund was reasonable based on the average advisory fee for the Fund's Lipper peer group. - - The board evaluated Hotchkis & Wiley's investment staff and portfolio management process and concluded that, under all the circumstances and based on its informed business judgment, the most appropriate course of action in the best interests of the Fund and its shareholders was to hire Hotchkis & Wiley as part of the Fund's multimanager structure to provide active investment management services, and to approve the agreement with Hotchkis & Wiley. B-39 VANGUARD When the board considers whether Vanguard should continue providing internalized investment management services at cost to the Fund, the board takes into account numerous factors, including: - - The nature, extent, and quality of the services provided. - - The investment performance of the Fund's assets managed by Vanguard. - - The fair market value of the services provided. - - A comparative analysis of expense ratios of, and advisory fees paid by, similar funds. - - Vanguard's control of the operating expenses of the Fund, such as transaction costs, including ways in which portfolio transactions for the Fund are conducted and brokers are selected. Based upon its most recent evaluation of the investment staff, the portfolio management process, the short and long-term performance, and the at-cost, internalized management arrangements for the Fund, the board determined that it would be in the best interests of the Fund's shareholders to continue its internalized management arrangement. PORTFOLIO TRANSACTIONS The advisor, pursuant to their agreements with the Funds, are authorized (with the approval of the Funds' board of trustees) to select the brokers or dealers that will execute the purchases and sales of securities for the Funds and are directed to use their best efforts to obtain the best available price and most favorable execution with respect to all transactions for the Funds under the circumstances. Each advisor has undertaken to execute each investment transaction at a price and commission which provides the most favorable total cost or proceeds reasonably obtainable under the circumstances. In placing securities transactions, each advisor will use its best judgment to choose the broker most capable of providing the brokerage services necessary to obtain the best available price and most favorable execution. The full range and quality of brokerage services available will be considered in making these determinations. In those instances in which it is reasonably determined that more than one broker can offer the brokerage services needed to obtain the best available price and most favorable execution, consideration may be given to those brokers who supply investment research and statistical information and provide other services in addition to execution services to the Funds and/or the advisor. Each advisor considers the investment services it receives useful in the performance of its obligations under the agreement, but is unable to determine precisely the amount by which such services may reduce its expenses. The agreements also incorporate the concepts of Section 28(e) of the Securities Exchange Act of 1934 by providing that, subject to the approval of the Funds' board of trustees, the advisor may cause the Funds to pay a broker-dealer which furnishes brokerage and research services a higher commission than that which might be charged by another broker-dealer for effecting the same transaction, provided that such commission is deemed reasonable in terms of either that particular transaction or the overall responsibilities of the advisor to the Funds. Currently, it is each Fund's policy that each advisor may at times pay higher commissions in recognition of brokerage services felt necessary for the achievement of better execution of certain securities transactions that otherwise might not be available. the advisor will only pay such higher commissions if it believes this to be in the best interest of the Fund. Some brokers or dealers who may receive such higher commissions in recognition of brokerage services related to execution of securities transactions are also providers of research information to an advisor and/or a Fund. However, the Funds have informed the advisor not to pay higher commission rates specifically for the purpose of obtaining research services. Some securities that are considered for investment by a Fund may also be appropriate for other Vanguard funds or for other clients served by the advisor. If such securities are compatible with the investment policies of a Fund and one or more of an advisor's other clients, and are considered for purchase or sale at or about the same time, then transactions in such securities will be aggregated by the advisor and the purchased securities or sale proceeds will be allocated among the participating Vanguard funds and the other participating clients of the advisor in a manner deemed equitable by the advisor. Although there may be no specified formula for allocating such transactions, the allocation methods used, and the results of such allocations, will be subject to periodic review by the Funds' board of trustees. B-40 During the fiscal years ended October 31, 2002, 2003, and 2004, the Funds paid brokerage commissions in the following amounts: FUND - ---- 2002 2003 2004 Vanguard Windsor Fund $14,310,000 $10,714,000 $xx,xxx,000 Vanguard Windsor II Fund 28,037,000 19,299,000 xx,xxx,000 PROXY VOTING GUIDELINES The Board of Trustees (the Board) of each Vanguard fund that invests in stocks has adopted proxy voting procedures and guidelines to govern proxy voting by the fund. The Board has delegated day-to-day oversight of proxy voting to the Proxy Oversight Committee (the Committee), comprised of senior Vanguard officers and subject to the operating procedures and guidelines described below. The Committee reports directly to the Board. Our overarching objective in voting is simple: to support proposals and director nominees that maximize the value of a fund's investments--and those of our fund shareholders--over the long term. While our goal is simple, the proposals we receive are varied and frequently complex. As such, the guidelines adopted by the Board provide a rigorous framework for assessing each proposal. The Board has designed the guidelines to stress Vanguard's role as a fiduciary with responsibility for evaluating each proposal on its merits, based on the particular facts and circumstances as presented. For most proxy proposals, particularly those involving corporate governance, the evaluation will result in the funds voting as a block. In some cases, however, funds may vote differently, depending upon the nature and objective of the funds, the composition of their portfolios and other factors. The guidelines do not permit Vanguard to delegate voting responsibility to a third party that does not serve as a fiduciary for the funds. Because many factors bear on each decision, the guidelines incorporate factors the Committee should consider in each voting decision. A fund may refrain from voting if refraining from voting would be in the fund's and its shareholders' best interests. These circumstances may arise, for example, when the expected cost of voting exceeds the expected benefits of voting, or exercising the vote results in the imposition of trading or other restrictions. In evaluating proxy proposals, we consider information from many sources, including the portfolio manager for the fund, management or shareholders of a company presenting a proposal, and independent proxy research services. We will give substantial weight to the recommendations of the company's board, absent guidelines or other specific facts that would support a vote against management. In all cases, however, the ultimate decision rests with the members of the Proxy Oversight Committee, who are accountable to the fund's Board. While serving as a framework, the following guidelines cannot contemplate all possible proposals with which a fund may be presented. In the absence of a specific guideline for a particular proposal (e.g., in the case of a transactional issue or contested proxy), the Committee will evaluate the issue and cast the fund's vote in a manner that, in the Committee's view, will maximize the value of the fund's investment. I. THE BOARD OF DIRECTORS A. ELECTION OF DIRECTORS We believe that good governance starts with a majority-independent board, whose key committees are comprised entirely of independent directors. As such, companies should attest to the independence of directors who serve on the Compensation, Nominating, and Audit committees. In any instance in which a director is not categorically independent, the basis for the independence determination should be clearly explained in the proxy statement. B-41 While we will generally support the board's nominees, we will take the following factors into account in determining our vote:
FACTORS FOR APPROVAL FACTORS AGAINST APPROVAL - -------------------- Nominated slate results in board comprised of a Nominated slate results in board comprised of a majority of non- majority of independent directors. independent directors. All members of Audit, Nominating, and Audit, Nominating, and/or Compensation committees include non- Compensation independent members. committees are independent of management. Incumbent board member failed to attend at least 75% of meetings in the previous year. Actions of committee(s) on which nominee serves are inconsistent with other guidelines (e.g., excessive option grants, substantial non-audit fees, lack of board independence).
B. CONTESTED DIRECTOR ELECTIONS In the case of contested board elections, we will evaluate the nominees' qualifications, the performance of the incumbent board, as well as the rationale behind the dissidents' campaign, to determine the outcome that we believe will maximize shareholder value. C. CLASSIFIED BOARDS We will generally support proposals to declassify existing boards (whether proposed by management or shareholders), and will block efforts by companies to adopt classified board structures, in which only part of the board is elected each year. II. APPROVAL OF INDEPENDENT AUDITORS We believe that the relationship between the company and its auditors should be limited primarily to the audit, although it may include certain closely related activities that do not, in the aggregate, raise any appearance of impaired independence. We will generally support management's recommendation for the ratification of the auditor, except in instances where audit and audit-related fees make up less than 50% of the total fees paid by the company to the audit firm. We will evaluate on a case-by-case basis instances in which the audit firm has a substantial non-audit relationship with the company (regardless of its size relative to the audit fee) to determine whether we believe independence has been compromised. III. COMPENSATION ISSUES A. STOCK-BASED COMPENSATION PLANS We believe that appropriately designed stock-based compensation plans, administered by an independent committee of the board and approved by shareholders, can be an effective way to align the interests of long-term shareholders and the interests of management, employees, and directors. Conversely, we oppose plans that substantially dilute our ownership interest in the company, provide participants with excessive awards, or have inherently objectionable structural features. An independent compensation committee should have significant latitude to deliver varied compensation to motivate the company's employees. However, we will evaluate compensation proposals in the context of several factors (a company's industry, market capitalization, competitors for talent, etc.) to determine whether a particular plan or proposal balances the perspectives of employees and the company's other shareholders. We will evaluate each proposal on a case-by-case basis, taking all material facts and circumstances into account. B-42 The following factors will be among those considered in evaluating these proposals.
FACTORS FOR APPROVAL FACTORS AGAINST APPROVAL Company requires senior executives to hold a minimum Total potential dilution (including all stock-based plans) exceeds 15% amount of company stock (frequently expressed as a multiple of share outstanding. of salary). Company requires stock acquired through option exercise to Annual option grants (for the past year and the past three years) have be held for a certain period of time. exceeded 2% of shares outstanding. Compensation program includes performance-vesting Plan permits repricing or replacement of options without shareholder awards, indexed options or other performance-linked grants. approval. Concentration of option grants to senior executives is Plan permits issuance of options with exercise prices below the limited (indicating that the plan is very broad-based). grant date market value of the company's stock. Stock-based compensation is clearly used as a substitute for Plan provides for the issuance of reload options. cash in delivering market-competitive total pay. Plan contains automatic share replenishment (evergreen) feature.
B. BONUS PLANS Bonus plans, which must be periodically submitted for shareholder approval to qualify for deductibility under Section 162(m) of the Internal Revenue Code, should have clearly defined performance criteria and maximum awards expressed in dollars. Bonus plans with awards that are excessive, in both absolute terms and relative to a comparative group, generally will not be supported. C. EMPLOYEE STOCK PURCHASE PLANS We will generally support the use of employee stock purchase plans to increase company stock ownership by employees, provided that shares purchased under the plan are acquired for no less than 85% of their market value and that shares reserved under the plan comprise less than 5% of the outstanding shares. D. EXECUTIVE SEVERANCE AGREEMENTS (GOLDEN PARACHUTES) While we believe that executives' incentives for continued employment should be more significant than severance benefits, there are instances--particularly in the event of a change in control--in which severance arrangements may be appropriate. Severance benefits triggered by a change in control that do not exceed three times an executive's salary and bonus may generally be approved by the compensation committee of the board without submission to shareholders. Any such arrangement under which the beneficiary receives more than three times salary and bonus--or where severance is guaranteed absent a change in control--should be submitted for shareholder approval. IV. CORPORATE STRUCTURE AND SHAREHOLDER RIGHTS We believe the exercise of shareholder rights, in proportion to economic ownership, to be a fundamental privilege of stock ownership that should not be unnecessarily limited. Such limits may be placed on shareholders' ability to act by corporate charter or by-law provisions, or by the adoption of certain takeover provisions. We believe that, in general, the market for corporate control should be allowed to function without undue interference from these artificial barriers. Our positions on a number of the most commonly presented issues in this area are as follows: A. SHAREHOLDER RIGHTS PLANS (POISON PILLS) A company's adoption of a so-called poison pill effectively limits a potential acquirer's ability to buy a controlling interest without the approval of the target's board of directors. Such a plan, in conjunction with other takeover defenses, may serve to entrench incumbent management and directors. However, in other cases, a pill may force a suitor to negotiate with the board and result in the payment of a higher acquisition premium. In general, we believe that shareholders should be afforded the opportunity to approve shareholder rights plans within a year of their adoption. This provides the board with the ability to put a poison pill in place for legitimate defensive purposes, subject to subsequent approval by shareholders. In evaluating the approval of proposed shareholder rights plans, we will consider the following factors: B-43
FACTORS FOR APPROVAL FACTORS AGAINST APPROVAL - -------------------- ------------------------ Plan is relatively short-term (3-5years). Plan is long term (>5 years). Plan requires shareholder approvalfor renewal. Renewal of plan is automatic or does not require shareholder approval. Plan incorporates review by a committee of independent Ownership trigger is less than 15%. directors at least every three years (so-called TIDE provisions). Classified board. Plan includes permitted bid/qualified offer feature (chewable pill) that mandates shareholder vote in Board with limited independence. certain situations. Ownership trigger is reasonable (15-20%). Highly independent, non-classified board.
B. CUMULATIVE VOTING We are generally opposed to cumulative voting under the premise that it allows shareholders a voice in director elections that is disproportionate to their economic investment in the corporation. C. SUPERMAJORITY VOTE REQUIREMENTS We support shareholders' ability to approve or reject matters presented for a vote based on a simple majority. Accordingly, we will support proposals to remove supermajority requirements and oppose proposals to impose them. D. RIGHT TO CALL MEETINGS AND ACT BY WRITTEN CONSENT We support shareholders' right to call special meetings of the board (for good cause and with ample representation) and to act by written consent. We will generally vote for proposals to grant these rights to shareholders and against proposals to abridge them. E. CONFIDENTIAL VOTING We believe that the integrity of the voting process is enhanced substantially when shareholders (both institutions and individuals) can vote without fear of coercion or retribution based on their votes. As such, we support proposals to provide confidential voting. F. DUAL CLASSES OF STOCK We are opposed to dual class capitalization structures that provide disparate voting rights to different groups of shareholders with similar economic investments. As such, we will oppose the creation of separate classes with different voting rights and will support the dissolution of such classes. V. CORPORATE AND SOCIAL POLICY ISSUES Proposals in this category, initiated primarily by shareholders, typically request that the company disclose or amend certain business practices. We generally believe that these are "ordinary business matters" that are primarily the responsibility of management and should be evaluated and approved solely by the corporation's board of directors. Often, proposals may address concerns with which we philosophically agree, but absent a compelling economic impact on shareholder value (e.g., proposals to require expensing of stock options), we will typically abstain from voting on these proposals. This reflects our belief that regardless of our philosophical perspective on the issue, these decisions should be the province of company management unless they have a significant, tangible impact on the value of our investment and, we don't view management as responsive to the matter. VI. VOTING IN FOREIGN MARKETS Corporate governance standards, disclosure requirements, and voting mechanics vary greatly among the markets outside the United States in which the funds may invest. We will use our votes, where applicable, to advocate for improvements in governance and disclosure by our portfolio companies. We will generally vote on issues presented to shareholders for our foreign holdings consistent with the guidelines described above, except as described below. B-44 Many foreign markets require that securities be "blocked" or reregistered to vote at a company's meeting. Absent an issue of compelling economic importance, we will generally not subject the fund to the loss of liquidity imposed by these requirements. The typical costs of voting (e.g., custodian fees, vote agency fees) in foreign markets are substantially higher than for U.S. holdings. As such, the fund may limit its voting on foreign holdings in instances where the issues presented are unlikely to have a material impact on shareholder value. VII. VOTING ON A FUND'S HOLDINGS OF OTHER VANGUARD FUNDS Certain Vanguard funds (owner funds) may, from time to time, own shares of other Vanguard funds (underlying funds). If an underlying fund submits a matter to a vote of its shareholders, votes for and against such matters on behalf of the owner funds will be cast in the same proportion as the votes of the other shareholders in the underlying fund. VIII. THE PROXY VOTING GROUP The Board has delegated the day-to-day function of voting proxies for the funds to the Proxy Voting Group, which the Proxy Oversight Committee oversees. While most votes will be determined through Vanguard's procedures and guidelines, there may be circumstances when the Proxy Voting Group will refer proxy issues to the Committee for consideration. In addition, at any time, the Board has the authority to vote proxies, when, in the Board's or the Committee's discretion, such action is warranted. The Proxy Voting Group performs the following functions: (1) managing proxy voting vendors; (2) reconciling share positions; (3) analyzing proxy proposals using factors described in the guidelines; (4) determining and addressing potential or actual conflicts of interest that may be presented by a particular proxy; and (5) voting proxies. The Proxy Voting Group also prepares periodic and special reports to the Board, and any proposed amendments to the procedures and guidelines. IX. THE PROXY OVERSIGHT COMMITTEE The Board, including a majority of the independent trustees, appoints the members of the Committee who are principals of Vanguard, and who have the requisite expertise to oversee proxy voting for the Vanguard funds. The Committee does not include anyone whose primary duties include external client relationship management or sales. This clear separation between the proxy voting and client relationship functions is intended to eliminate any potential conflict of interest in the proxy voting process. In the unlikely event that a member of the Committee believes he or she might have a conflict of interest regarding a proxy vote, that member must recuse him or herself from the committee meeting at which the matter is addressed, and not participate in the voting decision. The Committee works with the Proxy Voting Group to provide reports and other guidance to the Board regarding proxy voting by the Vanguard funds. The Committee has an obligation to conduct its meetings and exercise its decision-making authority subject to the fiduciary standards of good faith, fairness and Vanguard's Code of Ethics. The Committee shall authorize proxy votes that the Committee determines, in its sole discretion, to be in the best interests of the funds' shareholders. In determining how to apply the Guidelines to a particular factual situation, the Committee may not take into account any interest that would conflict with the interest of fund shareholders in maximizing the value of their investments. The Board may review these procedures and guidelines and modify them from time to time. The procedures and guidelines are available on Vanguard's website at www.vanguard.com. You may obtain a free copy of a report that details how the funds voted the proxies relating to the portfolio securities held by the funds for the prior 12-month period ended June 30 by logging on to Vanguard's internet site, at www.vanguard.com, or the SEC's website at http://www.sec.gov. YIELD AND TOTAL RETURNS The annualized yields for Vanguard Windsor Fund for the 30-day period ended October 31, 2004, were as follows: x.xx% for Investor Shares and x.xx% for Admiral Shares. The annualized yields for Vanguard Windsor II Fund for the same period were as follows: x.xx% for Investor Shares and x.xx% for Admiral Shares. B-45 The average annual total returns (both before and after taxes) of each Fund for the one-, five-, and ten-year periods ended October 31, 2004, are set forth below: 1 YEAR ENDED 5 YEARS ENDED 10 YEARS ENDED INVESTOR SHARES OCTOBER 31, 2004 OCTOBER 31, 2004 OCTOBER 31, 2004 - -------------------------------------------------------------------------------- VANGUARD WINDSOR FUND INVESTOR SHARES Return Before Taxes x.xx% x.xx% x.xx% Return After Taxes on Distributions x.xx x.xx x.xx Return After Taxes on Distributions and Sale of Fund Shares x.xx x.xx x.xx VANGUARD WINDSOR II FUND INVESTOR SHARES Return Before Taxes x.xx% x.xx% x.xx% Return After Taxes on Distributions x.xx x.xx x.xx Return After Taxes on Distributions and Sale of Fund Shares x.xx x.xx x.xx SINCE INCEPTION* 1 YEAR ENDED THROUGH ADMIRAL SHARES OCTOBER 31, 2004 OCTOBER 31, 2004 - -------------------------------------------------------------------------- VANGUARD WINDSOR FUND ADMIRAL SHARES Return Before Taxes x.xx% x.xx% Return After Taxes on Distributions x.xx x.xx Return After Taxes on Distributions and Sale of Fund Shares x.xx x.xx VANGUARD WINDSOR II FUND ADMIRAL SHARES Return Before Taxes x.xx% x.xx% Return After Taxes on Distributions x.xx x.xx Return After Taxes on Distributions and Sale of Fund Shares x.xx x.xx *Inception: Vanguard Windsor Fund Admiral Shares--November 12, 2001; Vanguard Windsor II Fund Admiral Shares--May 14, 2001. FINANCIAL STATEMENTS Each Fund's Financial Statements for the fiscal year ended October 31, 2004, appearing in the Funds' 2004 Annual reports to Shareholders, and the reports thereon of PricewaterhouseCoopers LLP, an independent registered public accounting firm, also appearing therein, are incorporated by reference in this Statement of Additional Information. For a more complete discussion of each Fund's performance, please see the Funds' Annual and Semiannual Reports to Shareholders, which may be obtained without charge. SAI022 022005 B-46 PART C VANGUARD WINDSOR FUNDS OTHER INFORMATION ITEM 22. EXHIBITS EXHIBIT DESCRIPTION (a) Declaration of Trust, filed on February 6, 2003, Post-Effective Amendment No. 99, is hereby incorporated by reference. (b) By-Laws, filed on December 11, 2003, Post-Effective Amendment No. 100, are hereby incorporated by reference. (c) Reference is made to Articles III and V of the Registrant's Declaration of Trust. (d) Investment Advisory Contract, filed on February 9, 2001, Post-Effective Amendment No. 95, for Sanford C. Bernstein & Co., Inc.; filed on December 11, 2003, Post-Effective No. 100 for Hotchkis and Wiley Capital Management LLC; filed on February 4, 2004, Post-Effective No. 101 for Equinox, Tukman Capital Management Inc., and Wellington Management Company, are hereby incorporated by reference. (e) Underwriting Contracts, Not applicable. (f) Reference is made to the section entitled "Management of the Funds" in the Registrant's Statement of Additional Information. (g) Custodian Agreement, filed on February 6, 2003, Post-Effective Amendment No. 99, for Citibank, N.A., is hereby incorporated by reference. (h) Amended and Restated Funds' Service Agreement, filed on February 6, 2003, Post-Effective Amendment No. 99, is hereby incorporated by reference. (i) Legal Opinion, Not Applicable. (j) Consent of Independent Accountants, to be filed by amendment. (k) Omitted Financial Statements, Not Applicable. (l) Initial Capital Agreements, Not Applicable. (m) Rule 12(b)-1 Plan, Not Applicable. (n) Rule 18f-3 Plan, is filed herewith. (o) Reserved, Not Applicable. (p) Code of Ethics, filed on February 6, 2003, Post-Effective Amendment No. 99 for Barrow, Hanley, Mewhinney & Srauss, Inc., Sanford C. Bernstein & Co., and Tukman Capital Management, Inc.; filed on December 11, 2003, Post-Effective Amendment No. 100 for The Vanguard Group, Inc., are hereby incorporated by reference; for Equinox Capital Management, Inc., and Wellington Management Company, are filed herewith. ITEM 23. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT Registrant is not controlled by or under common control with any person. ITEM 24. INDEMNIFICATION The Registrant's organizational documents contain provisions indemnifying Trustees and officers against liability incurred in their official capacity. Article VII, Section 2 of the Declaration of Trust provides that the Registrant may indemnify and hold harmless each and every Trustee and officer from and against any and all claims, demands, costs, losses, expenses, and damages whatsoever arising out of or related to the performance of his or her duties as a Trustee or officer. However, this provision does not cover any liability to which a Trustee or officer would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his or her office. Article VI of the By-Laws generally provides that the Registrant shall indemnify its Trustees and officers from any liability arising out of their past or present service in that capacity. Among other things, this provision excludes any liability arising by reason of willful misfeasance, bad faith, gross negligence, or the reckless disregard of the duties involved in the conduct of the Trustee's or officer's office with the Registrant. ITEM 25. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISERS Barrow, Hanley, Mewhinney & Strauss, Inc. (Barrow, Hanley) is an investment adviser registered under the Advisers Act. The list required by this Item 25 of officers and directors of Barrow, Hanley, together with any information as to any business profession, vocation, or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated herein by reference from Schedules B and D of Form ADV filed by Barrow, Hanley pursuant to the Advisers Act (SEC File No. 801-31237). Equinox Capital Management LLC (Equinox) is an investment adviser registered under the Advisers Act. The list required by this Item 25 of officers and directors of Equinox, together with any information as to any business profession, vocation, or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated herein by reference from Schedules B and D of Form ADV filed by Equinox pursuant to the Advisers Act (SEC File No. 801-34524). Hotchkis and Wiley, is an investment adviser registered under the Advisers Act. The list required by this Item 25 of officers and directors of Hotchkis and Wiley, together with any information as to any business profession, vocation, or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated herein by reference from Schedules B and D of Form ADV filed by Hotchkis and Wiley pursuant to the Advisers Act (SEC File No. 801-60512). Sanford C. Bernstein & Co., Inc. (Bernstein) is an investment adviser registered under the Advisers Act. The list required by this Item 25 of officers and directors of Bernstein, together with any information as to any business profession, vocation, or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated herein by reference from Schedules B and D of Form ADV filed by Bernstein pursuant to the Advisers Act (SEC File No. 801-10488). Tukman Capital Management, Inc. (Tukman) is an investment adviser registered under the Advisers Act. The list required by this Item 25 of officers and directors of Tukman, together with any information as to any business profession, vocation, or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated herein by reference from Schedules B and D of Form ADV filed by Tukman pursuant to the Advisers Act (SEC File No. 801-15279). Wellington Management Company (Wellington Management) is an investment adviser registered under the Advisers Act. The list required by this Item 25 of officers and directors of Wellington Management, together with any information as to any business profession, vocation, or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated herein by reference from Schedules B and D of Form ADV filed by Wellington Management pursuant to the Advisers Act (SEC File No. 801-15908). The Vanguard Group, Inc. (Vanguard) is an investment adviser registered under the Advisers Act. The list required by this Item 25 of officers and directors of Vanguard, together with any information as to any business profession, vocation, or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated herein by reference from Schedules B and D of Form ADV filed by Vanguard pursuant to the Advisers Act (SEC File No. 801-11953). ITEM 26. PRINCIPAL UNDERWRITERS Not Applicable ITEM 27. LOCATION OF ACCOUNTS AND RECORDS The books, accounts, and other documents required to be maintained by Section 31(a) under the 1940 Act and the rules promulgated thereunder will be maintained at the offices of Registrant; Registrant's Transfer Agent, The Vanguard Group, Inc., 100 Vanguard Boulevard, Malvern, PA 19355; and the Registrant's Custodian, Citibank, N.A., 111 Wall Street, New York, NY 10005. ITEM 28. MANAGEMENT SERVICES Other than as set forth in the section entitled "Management of the Funds" in Part B of this Registration Statement, the Registrant is not a party to any management-related service contract. ITEM 29. UNDERTAKINGS Not Applicable INDEX TO EXHIBITS Code of Ethics for Equinox. . . . . . . . . . . . . . . . Ex-99.P Code of Ethics for Wellington Management Company. . . . . Ex-99.P Rule 18f-3 Plan. . . . . . . . . . . . . . . . . . . . . .Ex-99.N SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant has duly caused this Post-Effective Amendment to this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Valley Forge and the Commonwealth of Pennsylvania, on the 20th day of December, 2004. VANGUARD WINDSOR FUNDS BY:_____________(signature)________________ (HEIDI STAM) JOHN J. BRENNAN* CHAIRMAN AND CHIEF EXECUTIVE OFFICER Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment to the Registration Statement has been signed below by the following persons in the capacities and on the date indicated: - -------------------------------------------------------------------------------- SIGNATURE TITLE DATE By:----------------------------President, Chairman, Chief December 20, 2004 /S/ JOHN J. BRENNAN Executive Officer, and (Heidi Stam) Trustee John J. Brennan* By:----------------------------Trustee December 20, 2004 /S/ CHARLES D. ELLIS (Heidi Stam) Charles D. Ellis* By:----------------------------Trustee December 20, 2004 /S/ RAJIV L. GUPTA (Heidi Stam) Rajiv L. Gupta* By:----------------------------Trustee December 20, 2004 /S/ JOANN HEFFERNAN HEISEN (Heidi Stam) JoAnn Heffernan Heisen* By:----------------------------Trustee December 20, 2004 /S/ BURTON G. MALKIEL (Heidi Stam) Burton G. Malkiel* By:----------------------------Trustee December 20, 2004 /S/ ANDRE F. PEROLD (Heidi Stam) Andre F. Perold* By:----------------------------Trustee December 20, 2004 /S/ ALFRED M. RANKIN, JR. (Heidi Stam) Alfred M. Rankin, Jr.* By:----------------------------Trustee December 20, 2004 /S/ J. LAWRENCE WILSON (Heidi Stam) J. Lawrence Wilson* By:----------------------------Treasurer and Principal December 20, 2004 /S/ THOMAS J. HIGGINS Financial Officer and (Heidi Stam) Principal Accounting Officer Thomas J. Higgins* *By Power of Attorney. Filed herewith. NOTICE THE PURPOSE OF THIS POWER OF ATTORNEY IS TO GIVE THE PERSONS YOU DESIGNATE (YOUR "AGENTS") BROAD POWERS TO ACT ON YOUR BEHALF WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION"), WHICH MAY INCLUDE, BUT ARE NOT LIMITED TO, POWERS TO FILE A REGISTRATION STATEMENT, TO FILE ANY AND ALL APPLICATIONS FOR EXEMPTIVE RELIEF FROM STATE OR FEDERAL REGULATIONS, AND TO PERFORM ANY AND ALL ACTS THE AGENTS DEEM NECESSARY TO ENABLE THE UNDERSIGNED PERSONS TO COMPLY WITH THE APPLICABLE LAWS OF THE UNITED STATES WITHOUT ADVANCE NOTICE TO YOU OR APPROVAL BY YOU. THIS POWER OF ATTORNEY DOES NOT IMPOSE A DUTY ON YOUR AGENTS TO EXERCISE GRANTED POWERS, BUT WHEN POWERS ARE EXERCISED, YOUR AGENTS MUST USE DUE CARE TO ACT FOR YOUR BENEFIT AND IN ACCORDANCE WITH THIS POWER OF ATTORNEY. YOUR AGENTS MAY EXERCISE THE POWERS GIVEN HERE THROUGHOUT YOUR LIFETIME, EVEN AFTER YOU BECOME INCAPACITATED, UNLESS YOU EXPRESSLY LIMIT THE DURATION OF THESE POWERS OR YOU REVOKE THESE POWERS OR A COURT ACTING ON YOUR BEHALF TERMINATES YOUR AGENTS' AUTHORITY. YOUR AGENTS MUST KEEP YOUR FUNDS SEPARATE FROM YOUR AGENTS' FUNDS. A COURT CAN TAKE AWAY THE POWERS OF YOUR AGENTS IF IT FINDS YOUR AGENTS ARE NOT ACTING PROPERLY. THE POWERS AND DUTIES OF AN AGENT UNDER A POWER OF ATTORNEY ARE EXPLAINED MORE FULLY IN 20 PA.C.S. CH. 56. IF THERE IS ANYTHING ABOUT THIS FORM THAT YOU DO NOT UNDERSTAND, YOU SHOULD ASK A LAWYER OF YOUR OWN CHOOSING TO EXPLAIN IT TO YOU. I HAVE READ OR HAD EXPLAINED TO ME THIS NOTICE AND I UNDERSTAND ITS CONTENTS.
NAME TITLE DATE /S/ JOHN J. BRENNAN DECEMBER 17, 2004 - -------------------------- Chairman, Chief Executive --------------------------- John J. Brennan Officer, and Trustee December 17, 2004 /S/ THOMAS J. HIGGINS DECEMBER 17, 2004 - -------------------------- Treasurer (Principal Financial --------------------------- Thomas J. Higgins and Accounting Officer) December 17, 2004 /S/ CHARLES D. ELLIS DECEMBER 17, 2004 - -------------------------- --------------------------- Charles D. Ellis Trustee December 17, 2004 /S/ RAJIV L. GUPTA DECEMBER 17, 2004 - -------------------------- --------------------------- Rajiv L. Gupta Trustee December 17, 2004 /S/ JOANN HEFFERNAN HEISEN DECEMBER 17, 2004 - -------------------------- --------------------------- JoAnn Heffernan Heisen Trustee December 17, 2004 /S/ BURTON G. MALKIEL DECEMBER 17, 2004 - -------------------------- --------------------------- Burton G. Malkiel* Trustee December 17, 2004 /S/ ANDRE F. PEROLD DECEMBER 17, 2004 - -------------------------- --------------------------- Andre F. Perold Trustee December 17, 2004 /S/ ALFRED M. RANKIN, JR. DECEMBER 17, 2004 - -------------------------- --------------------------- Alfred M. Rankin, Jr. Trustee December 17, 2004 /S/ J. LAWRENCE WILSON DECEMBER 17, 2004 - -------------------------- --------------------------- J. Lawrence Wilson Trustee December 17, 2004
The above-listed Directors/Trustees sit on the Board for each Registrant, except as follows: * Mr. Malkiel does not serve as a Director of Vanguard Fenway Funds. 2
Vanguard Wellington Fund Vanguard New York Tax-Free Funds By /S/ JOHN J. BRENNAN By /S/ JOHN J. BRENNAN -------------------- -------------------- Name: John J. Brennan Name: John J. Brennan Title: Chairman, Chief Executive Officer, and Title: Chairman, Chief Executive Officer, and Trustee Trustee Vanguard Windsor Funds Vanguard Pennsylvania Tax-Free Funds By /S/ JOHN J. BRENNAN By /S/ JOHN J. BRENNAN -------------------- -------------------- Name: John J. Brennan Name: John J. Brennan Title: Chairman, Chief Executive Officer, and Title: Chairman, Chief Executive Officer, and Trustee Trustee Vanguard World Funds Vanguard New Jersey Tax-Free Funds By /S/ JOHN J. BRENNAN By /S/ JOHN J. BRENNAN -------------------- -------------------- Name: John J. Brennan Name: John J. Brennan Title: Chairman, Chief Executive Officer, and Title: Chairman, Chief Executive Officer, and Trustee Trustee Vanguard Explorer Fund Vanguard Ohio Tax-Free Funds By /S/ JOHN J. BRENNAN By /S/ JOHN J. BRENNAN -------------------- -------------------- Name: John J. Brennan Name: John J. Brennan Title: Chairman, Chief Executive Officer, and Title: Chairman, Chief Executive Officer, and Trustee Trustee Vanguard Morgan Growth Fund Vanguard Convertible Securities Fund By /S/ JOHN J. BRENNAN By /S/ JOHN J. BRENNAN -------------------- -------------------- Name: John J. Brennan Name: John J. Brennan Title: Chairman, Chief Executive Officer, and Title: Chairman, Chief Executive Officer, and Trustee Trustee Vanguard Wellesley Income Fund Vanguard Quantitative Funds By /S/ JOHN J. BRENNAN By /S/ JOHN J. BRENNAN -------------------- -------------------- Name: John J. Brennan Name: John J. Brennan Title: Chairman, Chief Executive Officer, and Title: Chairman, Chief Executive Officer, and Trustee Trustee
3
Vanguard Fixed Income Securities Funds Vanguard Fenway Funds By /S/ JOHN J. BRENNAN By /S/ JOHN J. BRENNAN -------------------- -------------------- Name: John J. Brennan Name: John J. Brennan Title: Chairman, Chief Executive Officer, and Title: Chairman, Chief Executive Officer, and Trustee Trustee Vanguard Money Market Funds Vanguard Malvern Funds By /S/ JOHN J. BRENNAN By /S/ JOHN J. BRENNAN -------------------- -------------------- Name: John J. Brennan Name: John J. Brennan Title: Chairman, Chief Executive Officer, and Title: Chairman, Chief Executive Officer, and Trustee Trustee Vanguard International Equity Index Funds Vanguard Index Funds By /S/ JOHN J. BRENNAN By /S/ JOHN J. BRENNAN -------------------- -------------------- Name: John J. Brennan Name: John J. Brennan Title: Chairman, Chief Executive Officer, and Title: Chairman, Chief Executive Officer, and Trustee Trustee Vanguard Variable Insurance Fund Vanguard Municipal Bond Funds By /S/ JOHN J. BRENNAN By /S/ JOHN J. BRENNAN -------------------- -------------------- Name: John J. Brennan Name: John J. Brennan Title: Chairman, Chief Executive Officer, and Title: Chairman, Chief Executive Officer, and Trustee Trustee Vanguard STAR Fund Vanguard Trustees Equity Funds By /S/ JOHN J. BRENNAN By /S/ JOHN J. BRENNAN -------------------- -------------------- Name: John J. Brennan Name: John J. Brennan Title: Chairman, Chief Executive Officer, and Title: Chairman, Chief Executive Officer, and Trustee Trustee Vanguard Whitehall Funds Vanguard CMT Funds By /S/ JOHN J. BRENNAN By /S/ JOHN J. BRENNAN -------------------- -------------------- Name: John J. Brennan Name: John J. Brennan Title: Chairman, Chief Executive Officer, and Title: Chairman, Chief Executive Officer, and Trustee Trustee
4
Vanguard Specialized Funds Vanguard Tax-Managed Funds By /S/ JOHN J. BRENNAN By /S/ JOHN J. BRENNAN -------------------- -------------------- Name: John J. Brennan Name: John J. Brennan Title: Chairman, Chief Executive Officer, and Title: Chairman, Chief Executive Officer, and Trustee Trustee Vanguard Chester Funds Vanguard Treasury Fund By /S/ JOHN J. BRENNAN By /S/ JOHN J. BRENNAN -------------------- -------------------- Name: John J. Brennan Name: John J. Brennan Title: Chairman, Chief Executive Officer, and Title: Chairman, Chief Executive Officer, and Trustee Trustee Vanguard Florida Tax-Free Funds Vanguard Horizon Funds By /S/ JOHN J. BRENNAN By /S/ JOHN J. BRENNAN -------------------- -------------------- Name: John J. Brennan Name: John J. Brennan Title: Chairman, Chief Executive Officer, and Title: Chairman, Chief Executive Officer, and Trustee Trustee Vanguard California Tax-Free Funds Vanguard Institutional Index Funds By /S/ JOHN J. BRENNAN By /S/ JOHN J. BRENNAN -------------------- -------------------- Name: John J. Brennan Name: John J. Brennan Title: Chairman, Chief Executive Officer, and Title: Chairman, Chief Executive Officer, and Trustee Trustee Vanguard Balanced Index Fund Vanguard Bond Index Funds By /S/ JOHN J. BRENNAN By /S/ JOHN J. BRENNAN -------------------- -------------------- Name: John J. Brennan Name: John J. Brennan Title: Chairman, Chief Executive Officer, and Title: Chairman, Chief Executive Officer, and Trustee Trustee Vanguard Massachusetts Tax-Exempt Funds Vanguard Admiral Funds By /S/ JOHN J. BRENNAN By /S/ JOHN J. BRENNAN -------------------- -------------------- Name: John J. Brennan Name: John J. Brennan Title: Chairman, Chief Executive Officer, and Title: Chairman, Chief Executive Officer, and Trustee Trustee
5 POWER OF ATTORNEY Each person (as such term is defined in the Securities Act of 1933, as amended) whose signature appears below (the "Principals") hereby constitutes and appoints Heidi Stam and R. Gregory Barton and each of them, with full power to act without the other, as the true and lawful attorney-in-fact and agent, with full and several power of substitution, of such undersigned person with authority to take any appropriate action to execute in the name of and on behalf of such undersigned person, and to file with the Commission, any and all amendments (including without limitation post-effective amendments) to a registration statement, any and all applications for exemptive relief from state or federal regulations, and any and all amendments thereto, or any other forms of documents, including without limitation, any registration statement on Form N-14, and any and all amendments thereto, and to perform any and all such acts as such attorney-in-fact may deem necessary or advisable to enable the following named persons that are registered with the Commission (the "Registrants") to comply with the applicable laws of the United States, any individual state or similar jurisdiction of the United States, and in connection therewith to execute and file all requisite papers and documents, including but not limited to, applications, reports, notices, surety bonds, irrevocable consents and appointments of attorneys for service of process; granting to such attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act requisite and necessary to be done in connection therewith, as fully as the relevant Registrant and undersigned person might or could do herself, himself or itself or in person, hereby ratifying and confirming all that such attorneys-in-fact and agents or any of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof:
Vanguard Wellington Fund Vanguard New York Tax-Free Funds Vanguard Windsor Funds Vanguard Pennsylvania Tax-Free Funds Vanguard World Funds Vanguard New Jersey Tax-Free Funds Vanguard Explorer Fund Vanguard Ohio Tax-Free Funds Vanguard Morgan Growth Fund Vanguard Convertible Securities Fund Vanguard Wellesley Income Fund Vanguard Quantitative Funds Vanguard Fixed Income Securities Funds Vanguard Fenway Funds Vanguard Money Market Funds Vanguard Malvern Funds Vanguard Index Funds Vanguard International Equity Index Funds Vanguard Municipal Bond Funds Vanguard Variable Insurance Fund Vanguard Trustees Equity Funds Vanguard STAR Fund Vanguard Specialized Funds Vanguard Whitehall Funds Vanguard Chester Funds Vanguard Tax-Managed Funds Vanguard Florida Tax-Free Funds Vanguard Treasury Fund Vanguard California Tax-Free Funds Vanguard Horizon Funds Vanguard Massachusetts Tax-Exempt Funds Vanguard Institutional Index Funds Vanguard Balanced Index Fund Vanguard Admiral Funds Vanguard CMT Funds Vanguard Bond Index Funds
The Principals hereby revoke all powers of attorney which they may have heretofore granted regarding the subject matter hereof. 6 Each of the undersigned persons has executed this Power of Attorney in the capacity and on the date indicated opposite the name of the undersigned person.
NAME TITLE DATE /S/ JOHN J. BRENNAN DECEMBER 17, 2004 - -------------------------- Chairman, Chief Executive --------------------------- John J. Brennan Officer, and Trustee December 17, 2004 /S/ THOMAS J. HIGGINS DECEMBER 17, 2004 - -------------------------- Treasurer (Principal Financial --------------------------- Thomas J. Higgins and Accounting Officer) December 17, 2004 /S/ CHARLES D. ELLIS DECEMBER 17, 2004 - -------------------------- --------------------------- Charles D. Ellis Trustee December 17, 2004 /S/ RAJIV L. GUPTA DECEMBER 17, 2004 - -------------------------- --------------------------- Rajiv L. Gupta Trustee December 17, 2004 /S/ JOANN HEFFERNAN HEISEN DECEMBER 17, 2004 - -------------------------- --------------------------- JoAnn Heffernan Heisen Trustee December 17, 2004 /S/ BURTON G. MALKIEL DECEMBER 17, 2004 - -------------------------- --------------------------- Burton G. Malkiel* Trustee December 17, 2004 /S/ ANDRE F. PEROLD DECEMBER 17, 2004 - -------------------------- --------------------------- Andre F. Perold Trustee December 17, 2004 /S/ ALFRED M. RANKIN, JR. DECEMBER 17, 2004 - -------------------------- --------------------------- Alfred M. Rankin, Jr. Trustee December 17, 2004 /S/ J. LAWRENCE WILSON DECEMBER 17, 2004 - -------------------------- --------------------------- J. Lawrence Wilson Trustee December 17, 2004
The above-listed Directors/Trustees sit on the Board for each Registrant, except as follows: * Mr. Malkiel does not serve as a Director of Vanguard Fenway Funds. 7
Vanguard Wellington Fund Vanguard New York Tax-Free Funds By /S/ JOHN J. BRENNAN By /S/ JOHN J. BRENNAN -------------------- -------------------- Name: John J. Brennan Name: John J. Brennan Title: Chairman, Chief Executive Officer, and Title: Chairman, Chief Executive Officer, and Trustee Trustee Vanguard Windsor Funds Vanguard Pennsylvania Tax-Free Funds By /S/ JOHN J. BRENNAN By /S/ JOHN J. BRENNAN -------------------- -------------------- Name: John J. Brennan Name: John J. Brennan Title: Chairman, Chief Executive Officer, and Title: Chairman, Chief Executive Officer, and Trustee Trustee Vanguard World Funds Vanguard New Jersey Tax-Free Funds By /S/ JOHN J. BRENNAN By /S/ JOHN J. BRENNAN -------------------- -------------------- Name: John J. Brennan Name: John J. Brennan Title: Chairman, Chief Executive Officer, and Title: Chairman, Chief Executive Officer, and Trustee Trustee Vanguard Explorer Fund Vanguard Ohio Tax-Free Funds By /S/ JOHN J. BRENNAN By /S/ JOHN J. BRENNAN -------------------- -------------------- Name: John J. Brennan Name: John J. Brennan Title: Chairman, Chief Executive Officer, and Title: Chairman, Chief Executive Officer, and Trustee Trustee Vanguard Morgan Growth Fund Vanguard Convertible Securities Fund By /S/ JOHN J. BRENNAN By /S/ JOHN J. BRENNAN -------------------- -------------------- Name: John J. Brennan Name: John J. Brennan Title: Chairman, Chief Executive Officer, and Title: Chairman, Chief Executive Officer, and Trustee Trustee Vanguard Wellesley Income Fund Vanguard Quantitative Funds By /S/ JOHN J. BRENNAN By /S/ JOHN J. BRENNAN -------------------- -------------------- Name: John J. Brennan Name: John J. Brennan Title: Chairman, Chief Executive Officer, and Title: Chairman, Chief Executive Officer, and Trustee Trustee
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Vanguard Fixed Income Securities Funds Vanguard Fenway Funds By /S/ JOHN J. BRENNAN By /S/ JOHN J. BRENNAN -------------------- -------------------- Name: John J. Brennan Name: John J. Brennan Title: Chairman, Chief Executive Officer, and Title: Chairman, Chief Executive Officer, and Trustee Trustee Vanguard Money Market Funds Vanguard Malvern Funds By /S/ JOHN J. BRENNAN By /S/ JOHN J. BRENNAN -------------------- -------------------- Name: John J. Brennan Name: John J. Brennan Title: Chairman, Chief Executive Officer, and Title: Chairman, Chief Executive Officer, and Trustee Trustee Vanguard International Equity Index Funds Vanguard Index Funds By /S/ JOHN J. BRENNAN By /S/ JOHN J. BRENNAN -------------------- -------------------- Name: John J. Brennan Name: John J. Brennan Title: Chairman, Chief Executive Officer, and Title: Chairman, Chief Executive Officer, and Trustee Trustee Vanguard Variable Insurance Fund Vanguard Municipal Bond Funds By /S/ JOHN J. BRENNAN By /S/ JOHN J. BRENNAN -------------------- -------------------- Name: John J. Brennan Name: John J. Brennan Title: Chairman, Chief Executive Officer, and Title: Chairman, Chief Executive Officer, and Trustee Trustee Vanguard STAR Fund Vanguard Trustees Equity Funds By /S/ JOHN J. BRENNAN By /S/ JOHN J. BRENNAN -------------------- -------------------- Name: John J. Brennan Name: John J. Brennan Title: Chairman, Chief Executive Officer, and Title: Chairman, Chief Executive Officer, and Trustee Trustee Vanguard Whitehall Funds Vanguard CMT Funds By /S/ JOHN J. BRENNAN By /S/ JOHN J. BRENNAN -------------------- -------------------- Name: John J. Brennan Name: John J. Brennan Title: Chairman, Chief Executive Officer, and Title: Chairman, Chief Executive Officer, and Trustee Trustee
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Vanguard Specialized Funds Vanguard Tax-Managed Funds By /S/ JOHN J. BRENNAN By /S/ JOHN J. BRENNAN -------------------- -------------------- Name: John J. Brennan Name: John J. Brennan Title: Chairman, Chief Executive Officer, and Title: Chairman, Chief Executive Officer, and Trustee Trustee Vanguard Chester Funds Vanguard Treasury Fund By /S/ JOHN J. BRENNAN By /S/ JOHN J. BRENNAN -------------------- -------------------- Name: John J. Brennan Name: John J. Brennan Title: Chairman, Chief Executive Officer, and Title: Chairman, Chief Executive Officer, and Trustee Trustee Vanguard Florida Tax-Free Funds Vanguard Horizon Funds By /S/ JOHN J. BRENNAN By /S/ JOHN J. BRENNAN -------------------- -------------------- Name: John J. Brennan Name: John J. Brennan Title: Chairman, Chief Executive Officer, and Title: Chairman, Chief Executive Officer, and Trustee Trustee Vanguard California Tax-Free Funds Vanguard Institutional Index Funds By /S/ JOHN J. BRENNAN By /S/ JOHN J. BRENNAN -------------------- -------------------- Name: John J. Brennan Name: John J. Brennan Title: Chairman, Chief Executive Officer, and Title: Chairman, Chief Executive Officer, and Trustee Trustee Vanguard Balanced Index Fund Vanguard Bond Index Funds By /S/ JOHN J. BRENNAN By /S/ JOHN J. BRENNAN -------------------- -------------------- Name: John J. Brennan Name: John J. Brennan Title: Chairman, Chief Executive Officer, and Title: Chairman, Chief Executive Officer, and Trustee Trustee Vanguard Massachusetts Tax-Exempt Funds Vanguard Admiral Funds By /S/ JOHN J. BRENNAN By /S/ JOHN J. BRENNAN -------------------- -------------------- Name: John J. Brennan Name: John J. Brennan Title: Chairman, Chief Executive Officer, and Title: Chairman, Chief Executive Officer, and Trustee Trustee
10 ACKNOWLEDGMENT We, Heidi Stam and R. Gregory Barton, have read the attached power of attorney and are the persons identified as the agents for the Registrants. We hereby acknowledge that in the absence of a specific provision to the contrary in the power of attorney or in 20 Pa.C.S. when we act as agents: We shall exercise the powers for the benefit of the Registrants. We shall keep the assets of the Registrants separate from our assets. We shall exercise reasonable caution and prudence. We shall keep a full and accurate record of all actions, receipts, and disbursements on behalf of the Registrants. Date: DECEMBER 17, 2004 ------------------- /S/ HEIDI STAM ------------------------------ Heidi Stam /S/ R. GREGORY BARTON ------------------------------ R. Gregory Barton - -------------------------------------------------------------------------------- PROPOSED RESOLUTION APPROVAL OF A POWER OF ATTORNEY - -------------------------------------------------------------------------------- RESOLVED, that the proposed Power of Attorney, in substantially the form presented to this meeting, constituting and appointing Heidi Stam and R. Gregory Barton (each with full power to act alone) as attorneys-in-fact and agents for (i) each of the Directors, Trustees, principal executive officer and principal financial and accounting officer of the investment companies that are listed in the proposed Power of Attorney (each of such investment companies, a "Vanguard Company"); and (ii) each of the Vanguard Companies, for the purpose of executing and filing for and on behalf of the Vanguard Companies all requisite papers and documents with the U.S. Securities and Exchange Commission and the offices of the securities administrators of the states and similar jurisdictions of the United States to comply with the applicable laws of the United States, any individual state or similar jurisdiction of the United States, is hereby approved and may be executed by each designated Director/Trustee, officer and Vanguard Company.
EX-99.P 3 equinox42004.txt EQUINOX CAPITAL MANAGEMENT. LLC CODE OF ETHICS EQUINOX CAPITAL MANAGEMENT CODE OF ETHICS All employees, Directors and Officers will be required to follow the regulations stated below described in this Code of Ethics, the "Code", as they pertain to employee and employee-related trading. This type of trading should include self-directed activity for yourself, as well as for your spouse, minor children, or any person who lives with you, as well as any other account which you have any direct or indirect beneficial ownership: o All employees and related accounts will be restricted from trading in any security traded for ECM clients for the time frame detailed below. Specifically, once a stock is recommended for purchase or sale, it will be restricted for the same type of trade by ECM employees and related accounts. It will be restricted until the buy/sell program has been completed for all ECM clients. A seven-day black-out period between the completion of the trading program for ECM clients and the beginning of the employee program will be in effect. The same practice applies to a stock that is being reweighted in client portfolios, whether it is from a cash addition or withdrawal. If an employee has executed an order within the 7-day black-out period, in front of or behind the trade, prior to their knowledge of a stock recommendation or a client cash addition/withdrawal, the employee/related account execution will stand as long as the client receives the better execution price. If the employee/related account has received a better price, they will need to disgorge the difference to a charity. o All employee/related account trading covered by the Code must be approved prior to execution. Trades should be written up on a pre-printed trade ticket, and then signed off by Wendy Lee. If Wendy is not available, Ron Ulrich should sign the ticket. If Ron or Wendy are not available, then Laurie Vicari should sign the ticket. The ticket will then be approved and returned to you. You will not be able to execute your trade until you have received an approved trade ticket. The signed trade ticket completed with execution price should be given back to Laurie Vicari for inclusion in employee trading files, with a copy also given to Wendy Lee. If trades have been entered at a limit and are not executed on the day you received approval, the above procedure will need to be repeated the following day if you wish to complete the order. If the procedure is not repeated and the trade has not been approved, you should cancel the standing order. When seeking approval for a sell order, a brokerage statement dated at least 2 month ends prior to the sale date must be handed in at the same time for inclusion with the order memoranda. When trading while on the road, you will need to fax or email the individuals above, in the order above, with the details of your trade prior to execution. If affecting a sale transaction, you will need to fax the corresponding buy info in order to receive approval. You may not execute the trade until you have heard back via email or fax from the aforementioned individuals that your trade has been approved. You should then fax or email Laurie Vicari with the execution price that day. You will be responsible for writing up a formal trade ticket upon your arrival back to the office to which the fax or email will be attached to. You will not receive approval for new trades if "on the road" trade tickets have not been completed. Please note that again, if entering a limit order, the same rules as above apply with regard to re-entering trade information if the trade is not executed the same day. 1 o ECM Compliance must receive copies of all security transaction confirmations and monthly brokerage statements for all employee and employee-related accounts on a timely basis. These documents will then be reviewed and approved by Ron Ulrich. Mutual fund investments in Funds that ECM acts in a sub-advisory capacity for 1 will need to be disclosed, as well as ANY self-directed trading activity in ANY other type of investment, including bond activity for both employee and related accounts. Annual brokerage statements must be received for accounts that have not had any activity during the year and therefore would not generate interim statements. Within 10 days of employment inception, each person shall provide the Compliance Department with a list of security holdings as of the most recent month end for the accounts that they are required to report. o Employees and related accounts are prohibited from profiting in the purchase and sale, or sale and purchase, within 60 calendar days of the same securities, options or any other product defined by the Code that would require authorization prior to trading. Any profits realized on such short-term trades will be subject to disgorgement. o Employees and related accounts are prohibited from participating in private placement deals and IPO's. o Employees are restricted from serving on the Board of Directors of any company that is publicly traded. o Employees are prohibited from accepting gifts having a monetary value over $25, but are allowed to accept gifts such as tickets to sporting events and theater events on an occasional basis, and may accept food gifts as long as they are shared with staff. Please note that in addition to filling out quarterly 17-j-1 Forms, you will also be required to sign a yearly attestation letter affirming your knowledge and compliance with the Company's Code of Ethics. The above regulations will be strictly enforced, and failure to follow the Code will result in disciplinary action. 1 Funds that Equinox acts as Sub-Adviser for are listed in attached Appendix A. Employee investments in these Funds are subject to the terms detailed in the Code of Ethics. 2 APPENDIX "A" As stated in the Code of Ethics for Equinox Capital Management: ECM Compliance must receive copies of all security transaction confirmations and monthly brokerage statements for all employee and employee-related accounts on a timely basis. These documents will then be reviewed and approved by Ron Ulrich. MUTUAL FUND INVESTMENTS IN FUNDS THAT ECM ACTS IN A SUB-ADVISORY CAPACITY FOR (1) will need to be disclosed, as well as ANY self-directed trading activity in ANY other type of investment, including bond activity for both employee and related accounts. Annual brokerage statements must be received for accounts that have not had any activity during the year and therefore would not generate interim statements. Within 10 days of employment inception, each person shall provide the Compliance Department with a list of security holdings as of the most recent month end for the accounts that they are required to report. AS OF 1/1/04 FUNDS THAT EQUINOX CAPITAL MANAGEMENT ACT AS SUB-ADVISER: VANGUARD WINDSOR II FUND AB FUNDS TRUST VALUE EQUITY FUND 3 - -------- EX-99.P 4 wmccoe072004.txt WELLINGTON MANAGEMENT COMPANY, LLP CODE OF ETHICS Wellington Management Company, LLP Wellington Trust Company, NA Wellington Management International Ltd Wellington International Management Company Pte Ltd Wellington Global Investment Management Ltd CODE OF ETHICS MESSAGE FROM OUR CEO AND PRESIDENT "THE REPUTATION OF A THOUSAND YEARS MAY BE DETERMINED BY THE CONDUCT OF ONE HOUR." ANCIENT JAPANESE PROVERB We have said it time and again in our Goals, Strategy and Culture statement, "We exist for our clients and are driven by their needs." Wellington Management's reputation is built on this principle. We know that our reputation is our most valuable asset as that reputation attracts clients and promotes their trust and confidence in our firm's capabilities. We entrust our clients' interests and the firm's reputation every day to each Wellington Management employee around the world. Each of us must take constant care that our actions fully meet our duties as fiduciaries for our clients. Our clients' interests must always come first; they cannot and will not be compromised. We have learned through many experiences, that when we put our clients first, we are doing the right thing. If our standards slip, or our focus wanes, we risk the loss of everything we have worked so hard to build together over the years. It is important that we all remember "client, firm, person" is our most fundamental guiding principle. This high ethical standard is embodied in our Code of Ethics. The heart of the Code of Ethics goes to our obligation to remain vigilant in protecting the interests of our clients above our own. We encourage you to become familiar with all facets of the Code and trust that you will embrace and comply with both the letter and the spirit of the Code. Page 1 Wellington Management Company, LLP Wellington Trust Company, NA Wellington Management International Ltd Wellington International Management Company Pte Ltd. Wellington Global Investment Management Ltd CODE OF ETHICS TABLE OF CONTENTS Standards of Conduct 3 Ethical Considerations Regarding Confidentiality 4 Policy on Personal Securities Transactions 4 Accounts Covered 4 Transactions Subject to Pre-clearance 6 Securities and Other Instruments Subject to Pre-clearance 6 Transactions Exempt From Pre-clearance 6 Non-volitional Transactions 7 Requesting Pre-clearance 7 Restrictions on Covered Transactions 8 Blackout Periods 8 Short Term Trading 9 Securities of Brokerage Firms 10 Short Sales, Options and Margin Transactions 10 Derivatives 10 Initial Public Offerings ("IPOs") 10 Private Placements 11 Open-End Mutual Fund Transactions 11 Exemptive Procedure for Personal Trading 12 Reporting and Certification Requirements 12 Initial Holdings Report 12 Duplicate Brokerage Confirmations 13 Quarterly Reporting of Transactions and Brokerage Accounts 13 Annual Holdings Report 14 Quarterly Certifications 15 Annual Certifications 15 Review of Reports and Additional Requests 15 Gifts, Travel and Entertainment Opportunities and Sensitive Payments 16 General Principles 16 Accepting Gifts 16 Accepting Travel and Entertainment Opportunities 17 Solicitation of Gifts, Contributions, or Sponsorships 18 Giving Gifts (other than Entertainment Opportunities) 19 Providing Entertainment Opportunities 19 Sensitive Payments 20 Other Activities 20 Violations of the Code of Ethics 21 APPENDIX A - QUICK REFERENCE TABLE FOR PERSONAL SECURITIES TRANSACTIONS Page 2 Wellington Management Company, LLP Wellington Trust Company, NA Wellington Management International Ltd Wellington International Management Company Pte Ltd. Wellington Global Investment Management Ltd CODE OF ETHICS STANDARDS OF CONDUCT Wellington Management Company, LLP and its affiliates have a fiduciary duty to investment company and investment counseling clients that requires each Employee to act solely for the benefit of clients. As a firm and as individuals, our conduct (including our personal trading) must recognize that the firm's clients always come first and that we must avoid any abuse of our positions of trust and responsibility. Each Employee is expected to adhere to the highest standard of professional and ethical conduct and should be sensitive to situations that may give rise to an actual conflict or the appearance of a conflict with our clients' interests, or have the potential to cause damage to the firm's reputation. To this end, each Employee must act with integrity, honesty, dignity and in a highly ethical manner. Each Employee is also required to comply with all applicable securities laws. Moreover, each Employee must exercise reasonable care and professional judgment to avoid engaging in actions that put the image of the firm or its reputation at risk. While it is not possible to anticipate all instances of potential conflict or unprofessional conduct, the standard is clear. This Code of Ethics (the "Code") recognizes that our fiduciary obligation extends across all of our affiliates, satisfies our regulatory obligations and sets forth the policy regarding Employee conduct in those situations in which conflicts with our clients' interests are most likely to develop. ALL EMPLOYEES ARE SUBJECT TO THIS CODE AND ADHERENCE TO THE CODE IS A BASIC CONDITION OF EMPLOYMENT. IF AN EMPLOYEE HAS ANY DOUBT AS TO THE APPROPRIATENESS OF ANY ACTIVITY, BELIEVES THAT HE OR SHE HAS VIOLATED THE CODE, OR BECOMES AWARE OF A VIOLATION OF THE CODE BY ANOTHER EMPLOYEE, HE OR SHE SHOULD CONSULT TRACY SOEHLE, THE FIRMWIDE COMPLIANCE MANAGER, AT 617.790.8149, CYNTHIA CLARKE, OUR GENERAL COUNSEL AT 617.790.7426, OR CLARE VILLARI, THE CHAIR OF THE ETHICS COMMITTEE AT 617.951.5437. The Code reflects the requirements of United States law, Rule 17j-1 of the Investment Company Act of 1940, as amended on October 29, 1999, as well as the recommendations issued by an industry study group in 1994, which were strongly supported by the SEC. The term "Employee" includes all employees worldwide (including temporary employees compensated directly by Wellington Management and other temporary employees to the extent that their employment with Wellington Management exceeds 90 days) and Partners. Page 3 Wellington Management Company, LLP Wellington Trust Company, NA Wellington Management International Ltd Wellington International Management Company Pte Ltd. Wellington Global Investment Management Ltd CODE OF ETHICS ETHICAL CONSIDERATIONS REGARDING CONFIDENTIALITY CONFIDENTIALITY IS A CORNERSTONE OF WELLINGTON MANAGEMENT'S FIDUCIARY OBLIGATION TO ITS CLIENTS AS WELL AS AN IMPORTANT PART OF THE FIRM'S CULTURE. Use and Disclosure of Information Information acquired in connection with employment by the organization is confidential and may not be used in any way that might be contrary to, or in conflict with the interests of clients or the firm. Employees are reminded that certain clients have specifically required their relationship with our firm to be treated confidentially. Information regarding actual or contemplated investment decisions, portfolio composition, research, research recommendations, firm activities, or client interests is confidential and may not be disclosed to persons outside our organization and in no way can be used for personal gain or the gain of others. "Inside Information" Specific reference is made to the firm's Statement of Policy on the Receipt and Use of Material, Non-Public Information (i.e., "inside information"), accessible on the Wellington Management intranet, which applies to personal securities transactions as well as to client transactions. POLICY ON PERSONAL SECURITIES TRANSACTIONS All Employees are required to clear their personal securities transactions (as defined below) prior to execution, report their transactions and holdings periodically, and refrain from transacting either in certain types of securities or during certain blackout periods as described in more detail in this section. EMPLOYEES SHOULD NOTE THAT WELLINGTON MANAGEMENT'S POLICIES AND PROCEDURES WITH RESPECT TO PERSONAL SECURITIES TRANSACTIONS ALSO APPLY TO TRANSACTIONS BY A SPOUSE, DOMESTIC PARTNER, CHILD OR OTHER IMMEDIATE FAMILY MEMBER RESIDING IN THE SAME HOUSEHOLD AS THE EMPLOYEE. ACCOUNTS COVERED Definition of "Personal Securities Transactions" A personal securities transaction is a transaction in which an Employee has a beneficial interest. Page 4 Wellington Management Company, llp Wellington Trust Company, na Wellington Management International Ltd Wellington International Management Company Pte Ltd. Wellington Global Investment Management Ltd CODE OF ETHICS Definition of "Beneficial Interest" An Employee is considered to have a beneficial interest in any transaction in which the Employee has the opportunity to directly or indirectly profit or share in the profit derived from the securities transacted. An Employee is presumed to have a beneficial interest in, and therefore an obligation to pre-clear, the following: 1 Securities owned individually by the Employee, including securities held in IRA's and other retirement accounts. 2 Securities owned jointly by the Employee with others (e.g., joint accounts, spousal accounts, partnerships, trusts and controlling interests in corporations). 3 Securities in which a member of the Employee's immediate family (e.g., spouse, domestic partner, minor children and other dependent relatives) has a direct or indirect beneficial interest if the immediate family member resides in the same household as the Employee (including through a partnership, trust or other vehicle). This presumption may be rebutted if the Employee is able to provide the Operational Risk Management and Compliance Group (the "Compliance Group") with satisfactory assurances that the Employee has no beneficial interest in the security and exercises no control over investment decisions made regarding the security (see "Exceptions" below). Any question as to whether an Employee has a beneficial interest in a transaction, and therefore an obligation to pre-clear and report the transaction, should be directed to the Compliance Group. Exceptions If an Employee has a beneficial interest in an account that the Employee feels should not be subject to the Code's pre-clearance and reporting requirements, the Employee should submit a written request for clarification or an exemption to the Firmwide Compliance Manager. The request should name the account, describe the nature of the Employee's interest in the account, the person or firm responsible for managing the account, and the basis upon which the exemption is being claimed. Requests will be considered on a case-by-case basis. Examples of situations where grounds for an exemption may be presented include: Page 5 Wellington Management Company, LLP Wellington Trust Company, NA Wellington Management International Ltd Wellington International Management Company Pte Ltd. Wellington Global Investment Management Ltd CODE OF ETHICS * The Employee has no influence or control over the account (e.g., the Employee has a professionally managed account over which the Employee has given up discretion); or * The Employee has a substantial measure of influence or control over an account, but neither the Employee nor a member of the Employee's immediate family has any direct or indirect beneficial interest (e.g., a trust for which the Employee is a trustee but not a direct or indirect beneficiary); In all transactions involving such an account an Employee should, however, conform to the spirit of the Code and avoid any activity which might appear to conflict with the interests of the firm's investment company or counseling clients, or with the Employee's position within Wellington Management. In this regard, please note "Ethical Considerations Regarding Confidentiality," referenced in this Code, which do apply to such situations. TRANSACTIONS SUBJECT TO PRE-CLEARANCE Except as specifically exempted in this section, ALL EMPLOYEES MUST CLEAR THEIR PERSONAL SECURITIES TRANSACTIONS PRIOR TO EXECUTION. CLEARANCE FOR PERSONAL SECURITIES TRANSACTIONS FOR PUBLICLY TRADED SECURITIES WILL BE IN EFFECT FOR 24 HOURS FROM THE TIME OF APPROVAL. SEE APPENDIX A FOR A SUMMARY OF SECURITIES SUBJECT TO PRE-CLEARANCE AND REPORTING, REPORTING ONLY AND EXEMPT SECURITIES. 1 Securities and Other Instruments Subject to Pre-clearance ("COVERED TRANSACTIONS") Transactions in bonds (including municipal bonds), stock (including shares of closed end funds), Exchange Traded Funds ("ETFs") organized as something other than open-end mutual funds (such as HOLDRs), narrowly defined ETFs (such as sector ETFs), notes, convertibles, preferreds, ADRs, single stock futures, limited partnership and limited liability company interests (for example, hedge funds), options on securities, warrants, rights, etc., for US and non-US securities, whether publicly traded or privately placed are subject to the pre-clearance requirements of the Code. 2 Transactions Exempt from Pre-Clearance Pre-clearance and reporting is not required for transactions in open-end mutual funds (including broadly diversified Exchange Traded Funds organized as Page 6 Wellington Management Company, LLP Wellington Trust Company, NA Wellington Management International Ltd Wellington International Management Company Pte Ltd. Wellington Global Investment Management Ltd CODE OF ETHICS open-end mutual funds such as SPDRs, iShares, QUBEs, DIAMONDs, etc.), variable insurance products, US Government securities, money market instruments, Wellington Trust Company pools, Wellington Management sponsored hedge funds, broad-based stock index and US government securities futures and options on such futures, commodities futures, foreign currency transactions. 3 Non-volitional Transactions Pre-clearance is not required, but reporting is required for non-volitional transactions. Non-volitional transactions include: * automatic dividend reinvestment and stock purchase plan acquisitions; * gifts of securities to an Employee over which the Employee has no control of the timing; * gifts of securities from an Employee to non-profit organizations including private foundations and donor-advised funds; * gifts of securities from an Employee to a donee or transferee (other than a nonprofit organization) provided that the donee or transferee represents that he or she has no present intention of selling the donated security; and * transactions that result from a corporate action applicable to all similar security holders (such as splits, tender offers, mergers, stock dividends, etc.). PLEASE NOTE, HOWEVER, THAT MOST OF THESE TRANSACTIONS MUST BE REPORTED EVEN THOUGH THEY DO NOT HAVE TO BE PRE-CLEARED. SEE "REPORTING AND CERTIFICATION REQUIREMENTS." An Employee wishing to seek an exemption from the pre-clearance requirement for a security or instrument not covered by an exception that has similar characteristics to an excepted security or transaction should submit a request in writing to the Firmwide Compliance Manager. 4 Requesting Pre-Clearance Clearance for Covered Transactions must be obtained by submitting a request via the intranet-based Code of Ethics Compliance System ("COEC"). Approval must be obtained prior to placing the trade with a broker. Employees are responsible for ensuring that the proposed transaction does not violate Wellington Management's policies or applicable securities laws and regulations by virtue of the Employee's responsibilities at Wellington Management or the Page 7 Wellington Management Company, LLP Wellington Trust Company, NA Wellington Management International Ltd Wellington International Management Company Pte Ltd. Wellington Global Investment Management Ltd CODE OF ETHICS information that he or she may possess about the securities or the issuer. The Compliance Group will maintain a confidential log of all requests for approval. Covered Transactions offered through a participation in a private placement (including both securities and partnership interests) are subject to special clearance by the Chief Compliance Officer or the General Counsel or their designee, and the clearance will remain in effect for a reasonable period thereafter, not to exceed 90 days. RESTRICTIONS ON COVERED TRANSACTIONS Covered Transactions are restricted and will be denied pre-clearance under the circumstances described below. Please note that the following restrictions on Covered Transactions apply equally to the Covered Transaction and to instruments related to the Covered Transaction. A related instrument is any security or instrument issued by the same entity as the issuer of the Covered Transaction, including options, rights, warrants, preferred stock, bonds and other obligations of that issuer or instruments otherwise convertible into securities of that issuer. THE RESTRICTIONS AND BLACKOUT PERIODS PROSCRIBED BELOW ARE DESIGNED TO AVOID CONFLICT WITH OUR CLIENTS' INTERESTS. HOWEVER, PATTERNS OF TRADING THAT MEET THE LETTER OF THE RESTRICTIONS BUT ARE INTENDED TO CIRCUMVENT THE RESTRICTIONS ARE PROHIBITED. IT IS EXPECTED THAT EMPLOYEES WILL COMPLY WITH THE RESTRICTIONS BELOW IN GOOD FAITH AND CONDUCT THEIR PERSONAL SECURITIES TRANSACTIONS IN KEEPING WITH THE INTENDED PURPOSE OF THIS CODE. 1 Blackout Periods No Employee may engage in Covered Transactions involving securities or instruments which the Employee knows are actively contemplated for transactions on behalf of clients, even though no buy or sell orders have been placed. This restriction applies from the moment that an Employee has been informed in any fashion that any Portfolio Manager intends to purchase or sell a specific security or instrument. This is a particularly sensitive area and one in which each Employee must exercise caution to avoid actions which, to his or her knowledge, are in conflict or in competition with the interests of clients. Page 8 Wellington Management Company, LLP Wellington Trust Company, NA Wellington Management International Ltd Wellington International Management Company Pte Ltd. Wellington Global Investment Management Ltd CODE OF ETHICS Employee Blackout Periods An Employee will be denied pre-clearance for Covered Transactions that are: * being bought or sold on behalf of clients until one trading day after such buying or selling is completed or canceled. * the subject of a new or changed action recommendation from a research analyst until 10 business days following the issuance of such recommendation; * the subject of a reiterated but unchanged recommendation from a research analyst until 2 business days following re-issuance of the recommendation. Portfolio Manager Additional Blackout Period In addition to the above, an Employee who is a Portfolio Manager may not engage in a personal transaction involving any security for 7 calendar days prior to, and 7 calendar days following, a transaction in the same security for a client account managed by that Portfolio Manager without a special exemption. See "Exemptive Procedures for Personal Trading" below. Portfolio Managers include all designated portfolio managers and other investment professionals that have portfolio management responsibilities for client accounts or who have direct authority to make investment decisions to buy or sell securities, such as investment team members and analysts involved in Research Equity portfolios. All Employees who are considered Portfolio Managers will be so notified by the Compliance Group. 2 Short Term Trading THE CODE STRONGLY DISCOURAGES SHORT TERM TRADING BY EMPLOYEES. In addition, no Employee may take a "short term trading" profit in a security, which means the sale of a security at a gain (or closing of a short position at a gain) within 60 calendar days of its purchase (beginning on trade date plus one), without a special exemption. See "Exemptive Procedures for Personal Trading". The 60 day prohibition does not apply to transactions resulting in a loss. 3 Securities of Brokerage Firms Employees engaged in equity or bond trading and Employees with portfolio management responsibility for client accounts may not engage in personal Page 9 Wellington Management Company, LLP Wellington Trust Company, NA Wellington Management International Ltd Wellington International Management Company Pte Ltd. Wellington Global Investment Management Ltd CODE OF ETHICS transactions involving any equity or debt securities of any company whose primary business is that of a broker/dealer. 4 Short Sales, Options and Margin Transactions THE CODE STRONGLY DISCOURAGES SHORT SALES, OPTIONS AND MARGIN TRANSACTIONS. Subject to pre-clearance, Employees may engage in short sales, options and margin transactions, however, Employees engaging in such transactions should recognize the danger of being "frozen" or subject to a forced close out because of the general restrictions that apply to personal transactions as noted above. These types of activities are risky not only because of the nature of the transactions, but also because action necessary to close out a position may become prohibited under the Code while the position remains open. FOR EXAMPLE, YOU MAY NOT BE ABLE TO CLOSE OUT SHORT SALES AND TRANSACTIONS IN DERIVATIVES. In specific cases of hardship, an exception may be granted by the Chief Compliance Officer or the General Counsel with respect to an otherwise "frozen" transaction. Particular attention should be paid to margin transactions. Employees should understand that brokers of such transactions generally have the authority to automatically sell securities in the Employee's brokerage account to cover a margin call. Such sale transactions will be in violation of the Code unless they are pre-cleared. Employees engaging in margin transactions should be clear that exceptions will not be granted after the fact for these violations. 5 Derivatives Transactions in derivative instruments shall be restricted in the same manner as the underlying security. Employees engaging in derivative transactions are reminded to pay particular attention to paragraph 4 above. 6 Initial Public Offerings ("IPOs") No Employee may engage in personal transactions involving the direct purchase of any security (debt or equity) in an IPO (including initial offerings of closed-end funds). This restriction also includes new issues resulting from spin-offs, municipal securities, and thrift conversions, although in limited cases the purchase of such securities in an offering may be approved by the Chief Compliance Officer or the General Counsel upon determining that approval Page 10 Wellington Management Company, LLP Wellington Trust Company, NA Wellington Management International Ltd Wellington International Management Company Pte Ltd. Wellington Global Investment Management Ltd CODE OF ETHICS would not violate any policy reflected in this Code. This restriction does not apply to initial offerings of open-end mutual funds, US government issues or money market instruments. 7 Private Placements EMPLOYEES MAY NOT PURCHASE SECURITIES IN PRIVATE PLACEMENTS (INCLUDING NON-AFFILIATED HEDGE FUNDS) UNLESS APPROVAL OF THE CHIEF COMPLIANCE OFFICER, THE GENERAL COUNSEL OR THEIR RESPECTIVE DESIGNEE HAS BEEN OBTAINED. This approval will be based upon a determination that the investment opportunity need not be reserved for clients, that the Employee is not being offered the investment opportunity due to his or her employment with Wellington Management, and other relevant factors on a case-by-case basis. If the Employee has portfolio management or securities analysis responsibilities and is granted approval to purchase a private placement, he or she must disclose the privately placed holding if asked to evaluate the issuer of the security. An independent review of the Employee's analytical work or decision to purchase the security for a client account will then be performed by another investment professional with no personal interest in the transaction. OPEN-END MUTUAL FUND TRANSACTIONS Wellington Management requires that Employees engaging in mutual fund investments ensure that all investments in open-end mutual funds comply with the fund's rules regarding purchases, redemptions, and exchanges. Notwithstanding the above, the firm has a fiduciary relationship with the funds for which it serves as investment adviser or sub-adviser. Accordingly, Employees may not engage in any activity in the funds advised or sub-advised by Wellington Management that might be perceived as contrary to or in conflict with the interests of such funds or their shareholders. Employees are further prohibited from benefiting from or enabling others to benefit from, information about contemplated or actual securities trades in any mutual fund portfolio sub-advised by Wellington Management. (See "Ethical Considerations Regarding Confidentiality") EXEMPTIVE PROCEDURE FOR PERSONAL TRADING In cases of hardship, the Firmwide Compliance Manager, the General Counsel, or their respective designee can grant exemptions from the personal trading restrictions in this Code. The decision will be based on a determination that a hardship exists and the transaction for which an exemption is requested would Page 11 Wellington Management Company, llp Wellington Trust Company, na Wellington Management International Ltd Wellington International Management Company Pte Ltd. Wellington Global Investment Management Ltd CODE OF ETHICS not result in a conflict with our clients' interests or violate any other policy embodied in this Code. Other factors that may be considered include: the size and holding period of the Employee's position in the security, the market capitalization of the issuer, the liquidity of the security, the amount and timing of client trading in the same or a related security, and other relevant factors. Any Employee seeking an exemption should submit a written request to the Firmwide Compliance Manager or the General Counsel, setting forth the nature of the hardship along with any pertinent facts and reasons why the employee believes that the exemption should be granted. Employees are cautioned that exemptions are intended to be exceptions, and repetitive requests for exemptions by an Employee are not likely to be granted. Records of the approval of exemptions and the reasons for granting exemptions will be maintained by the Compliance Group. REPORTING AND CERTIFICATION REQUIREMENTS Records of personal securities transactions by Employees and their immediate family members will be maintained. All Employees are subject to the following reporting and certification requirements: 1 Initial Holdings Report New Employees are required to file an Initial Holdings Report and a Disciplinary Action Disclosure form within ten (10) calendar days of joining the firm. New Employees must disclose all of their security holdings in Covered Transactions, including private placement securities, at this time. New Employees are also required to disclose all of their brokerage accounts at that time, even if the only securities held in such accounts are mutual funds. Personal trading is prohibited until these reports are filed. The forms can be filed via the COEC that is accessible on the Wellington Management intranet. 2 Duplicate Brokerage Confirmations Employees may place securities transactions with the broker of their choosing. All Employees must require their securities brokers to send duplicate confirmations of their securities transactions to the Compliance Group. Brokerage firms are accustomed to providing this service. Page 12 Wellington Management Company, LLP Wellington Trust Company, NA Wellington Management International Ltd Wellington International Management Company Pte Ltd. Wellington Global Investment Management Ltd CODE OF ETHICS To arrange for the delivery of duplicate confirmations, each Employee must complete a Duplicate Confirmation Request Form for each brokerage account that is used for personal securities transactions of the Employee and each account in which the Employee has a beneficial interest and return the form to the Compliance Group. The form can be obtained from the Compliance Group or the Wellington Management intranet. The form must be completed and returned to the Compliance Group prior to any transactions being placed with the broker. The Compliance Group will process the request with the broker in order to assure delivery of the confirmations directly to the Compliance Group and to preserve the confidentiality of this information. When possible, the duplicate confirmation requirement will be satisfied by electronic filings from securities depositories. Employees should not send the completed forms to their brokers directly. If under local market practice, brokers are not willing to deliver duplicate confirmations to the Compliance Group, it is the Employee's responsibility to provide promptly the Compliance Group with a duplicate confirmation (either a photocopy or facsimile) for each trade. 3 Quarterly Reporting of Transactions and Brokerage Accounts SEC rules require that a quarterly record of all personal securities transactions be submitted by each person subject to the Code's requirements within 10 calendar days after the end of each calendar quarter and that this record be available for inspection. To comply with these SEC rules, every Employee must file a quarterly personal securities transaction report electronically utilizing the COEC accessible to all Employees via the Wellington Management intranet by this deadline. At the end of each calendar quarter, Employees will be reminded of the SEC filing requirement. An Employee that fails to file within the SEC's 10 calendar day deadline will, at a minimum, be prohibited from engaging in personal trading until the required filings are made. Transactions during the quarter as periodically entered via the COEC by the Employee are displayed on the Employee's reporting screen and must be affirmed if they are accurate. Holdings not acquired through a broker and certain holdings that were not subject to pre-clearance (as described below) must also be entered by the Employee. Page 13 Wellington Management Company, LLP Wellington Trust Company, NA Wellington Management International Ltd Wellington International Management Company Pte Ltd. Wellington Global Investment Management Ltd CODE OF ETHICS ALL EMPLOYEES ARE REQUIRED TO SUBMIT A QUARTERLY REPORT, EVEN IF THERE WERE NO REPORTABLE TRANSACTIONS DURING THE QUARTER. THE QUARTERLY REPORT MUST INCLUDE INFORMATION REGARDING: * all Covered Transactions (as defined on page 6); * any new brokerage account established during the quarter including the name of the broker, dealer or bank and the date the account was established; and * non-volitional transactions (as described on page 7 and below). Non-volitional transactions must be reported even though pre-clearance is not required and the nature of the transaction must be clearly specified in the report. Non-volitional transactions include automatic dividend reinvestment and stock purchase plan acquisitions, gifts of securities to and from the Employee, and transactions that result from corporate actions applicable to all similar security holders (such as splits, tender offers, mergers, stock dividends). 4 Annual Holdings Report SEC Rules also require that each Employee file, on an annual basis, a schedule indicating their personal securities holdings as of December 31 of each year by the following January 30. SEC Rules require that this report include the title, number of shares and principal amount of each security held in an Employee's personal account and the accounts for which the Employee has a beneficial interest, and the name of any broker, dealer or bank with whom the Employee maintains an account. "Securities" for purposes of this report are Covered Transactions and those that must be reported as indicated in the prior section. Employees are also required to disclose all of their brokerage accounts at this time, even if the only securities held in such accounts are mutual funds. 5 Quarterly Certifications As part of the quarterly reporting process on the COEC, Employees are required to confirm their compliance with the provisions of this Code of Ethics. In addition, each Employee is also required to identify any issuer for which the Employee owns more than 0.5% of the outstanding securities. Page 14 Wellington Management Company, llp Wellington Trust Company, na Wellington Management International Ltd Wellington International Management Company Pte Ltd. Wellington Global Investment Management Ltd CODE OF ETHICS 6 Annual Certifications As part of the annual reporting process on the COEC, each Employee is required to certify that: * The Employee has read the Code and understands its terms and requirements; * The Employee has complied with the Code during the course of his or her association with the firm; * The Employee has disclosed and reported all personal securities transactions and brokerage accounts required to be disclosed or reported; * The Employee will continue to comply with the Code in the future; * The Employee will promptly report to the Compliance Group, the General Counsel, or the Chair of the Ethics Committee any violation or possible violation of the Code of which the Employee becomes aware; and * The Employee understands that a violation of the Code may be grounds for disciplinary action or termination and may also be a violation of federal and/or state securities laws. 7 Review of Reports and Additional Requests All reports filed in accordance with this section will be maintained and kept confidential by the Compliance Group. Such reports will be reviewed by the Firmwide Compliance Manager or his/her designee. The firm may request other reports and certifications from Employees as may be deemed necessary to comply with applicable regulations and industry best practices. GIFTS, TRAVEL AND ENTERTAINMENT OPPORTUNITIES, AND SENSITIVE PAYMENTS Occasionally, Employees may be offered, or may receive, gifts from clients, brokers, vendors, or other organizations with whom the firm transacts business. The giving and receiving of gifts and opportunities to travel and attend entertainment events are subject to the general principles outlined below and are permitted only under the circumstances specified in this section of the Code. 1 General Principles Applicable to Gifts, Travel and Entertainment Opportunities, and Sensitive Payments Giving and receiving gifts and participating in entertainment events cannot occur if the frequency and/or value of a gift or entertainment event may be considered excessive or extravagant. No gift, travel and entertainment Page 15 Wellington Management Company, LLP Wellington Trust Company, NA Wellington Management International Ltd Wellington International Management Company Pte Ltd. Wellington Global Investment Management Ltd CODE OF ETHICS opportunity or payment may be made by the firm or any Employee to any outside party for the purpose of securing or retaining business for Wellington Management, or for influencing any decision on its behalf. If giving or receiving a gift, travel and entertainment opportunity or sensitive payment would create or appear to create a conflict with the interests of our clients or the firm, such gift, travel and entertainment opportunity or sensitive payment is not permitted. With regard to gifts and entertainment opportunities received as permitted under the Code, under no circumstances is it acceptable for an Employee to resell a gift or ticket to an entertainment event. 2 Accepting Gifts Acceptance of cash (including cash equivalents such as gift certificates, bonds, securities or other items that may be readily converted to cash) or gifts that may be considered excessive or extravagant, as measured by the total value or quantity of the gift(s), is prohibited. Gifts (other than entertainment tickets) of a nominal value (i.e., gifts whose reasonable value is no more than $100) and promotional items (e.g., pens, mugs, t-shirts and other logo bearing items) may be accepted. If an Employee receives any gift that is prohibited under the Code, it must be declined or returned in order to protect the reputation and integrity of Wellington Management. Any question as to the appropriateness of any gift should be directed to the Chief Compliance Officer, the General Counsel or the Chair of the Ethics Committee. Gifts that are directed to Wellington Management as a firm should be cleared with the Employee's Business Manager. Such gifts, if approved, will be accepted on behalf of, and treated as the property of, the firm. 3 Accepting Travel and Entertainment Opportunities Wellington Management recognizes that gatherings with representatives from organizations with whom the firm transacts business, such as brokers, vendors, and clients, are important relationship building exercises. Accordingly, occasional participation in lunches, dinners, cocktail parties, concerts, theater events, golf or other sporting activities or outings is not prohibited. However, before accepting an invitation to an activity or outing that is high profile, Page 16 Wellington Management Company, LLP Wellington Trust Company, NA Wellington Management International Ltd Wellington International Management Company Pte Ltd. Wellington Global Investment Management Ltd CODE OF ETHICS unusual, or otherwise outside the scope of the above, Employees must clear their participation with their Business Manager. Similarly, under such circumstances, Business Managers must clear their participation with the Chief Executive Officer or the Chair of the Ethics Committee. Employees should exercise reasonable business judgment with respect to their participation in such events, and demonstrate high standards of personal conduct when in attendance. Participation in an entertainment opportunity that may be considered excessive or extravagant, as measured by the total value or number of Wellington Management participants, is prohibited. Employees should be particularly sensitive with respect to the totality of the expenses related to entertainment opportunities, and ensure that expenses related to tickets, travel and lodging, car and limousine services, and air travel comply with the following requirements: * Entertainment Tickets Employees may be offered tickets to a variety of events for business entertainment purposes. Tickets may be accepted under the following circumstances: If the host is present with the Employee at the event, an Employee may accept tickets with a FACE VALUE of $250 or less. If the FACE VALUE of the ticket exceeds $250, the Employee must reimburse the host the amount of the excess. If the host is not present, the Employee may only accept the tickets if the Employee reimburses the host for the TOTAL FACE VALUE of the tickets. It is the Employee's responsibility to ensure that the host accepts such reimbursement and whenever possible, arrange for reimbursement prior to accepting any tickets. * Travel and Lodging Business related travel and lodging must be paid for by Wellington Management. Entertainment related travel and lodging must be paid for by the Employee. In the event that an Employee receives an invitation to, and is approved to attend, an entertainment event (including a ticketed event as described above) for which the travel and lodgings are arranged and secured by the host, the Employee may not attend unless the Employee reimburses the host for the reasonable equivalent cost of such travel and lodging (e.g., full airfare, ground transportation and hotel). It is the Employee's responsibility to ensure that the host accepts such reimbursement and whenever possible, arrange for reimbursement prior to attending such an event. * Car and Limousine Services Page 17 Wellington Management Company, LLP Wellington Trust Company, NA Wellington Management International Ltd Wellington International Management Company Pte Ltd. Wellington Global Investment Management Ltd CODE OF ETHICS When accompanied by a host, Employees should exercise reasonable business judgment with respect to accepting rides in limousines and car services. Except where circumstances warrant (e.g., where safety is a concern), Employees are discouraged from accepting limousine and car services paid for by a host when the host is not present. * Air Travel Employees are not permitted to accept a gift of air travel in connection with any entertainment related activity. The cost of airfare, as determined by Wellington Management's Travel Manager, must be paid by the Employee. The host must accept reimbursement of the cost of a ticket for a commercial flight. With respect to private aircraft or charter flights, the host must accept reimbursement equivalent to the cost of a full fare, first class commercial flight, as determined by Wellington Management's Travel Manager. It is the Employee's responsibility to ensure that the host accepts such reimbursement and whenever possible, arrange for reimbursement prior to attending such an event. With respect to business related travel, the cost of airfare must be paid by Wellington Management and shall be determined as outlined above. WELLINGTON MANAGEMENT STRONGLY DISCOURAGES THE USE OF PRIVATE AIRCRAFT OR CHARTER FLIGHTS FOR BUSINESS OR ENTERTAINMENT RELATED TRAVEL. 4 Solicitation of Gifts, Contributions, or Sponsorships Employees may not solicit gifts, entertainment tickets, gratuities, contributions (including charitable contributions), or sponsorships from brokers, vendors, clients or companies in which the firm invests or conducts research. Similarly, Employees are prohibited from making such requests through Wellington Management's Trading Department or any other Wellington Management Department or employee (this prohibition does not extend to personal gifts or offers of Employee owned tickets between Employees). 5 Giving Gifts (other than Entertainment Opportunities) In appropriate circumstances, it may be acceptable for the firm or its Employees to extend gifts to clients or others who do business with Wellington Management. Gifts of cash (including cash equivalents such as gift certificates, bonds, securities or other items that may be readily converted to cash) or excessive or extravagant gifts, as measured by the total value or quantity of the Page 18 Wellington Management Company, LLP Wellington Trust Company, NA Wellington Management International Ltd Wellington International Management Company Pte Ltd. Wellington Global Investment Management Ltd CODE OF ETHICS gift(s), are prohibited. Gifts with a face value in excess of $100 must be cleared by the Employee's Business Manager. Employees should be certain that the gift does not give rise to a conflict with client interests, or the appearance of a conflict, and that there is no reason to believe that the gift violates any applicable code of conduct of the recipient. Gifts are permitted only when made in accordance with applicable laws and regulations, and in accordance with generally accepted business practices in the various countries and jurisdictions where Wellington Management does business. 6 Providing Entertainment Opportunities Employees are not permitted to source tickets to entertainment events from Wellington Management's Trading Department or any other Wellington Management Department or employee, brokers, vendors, or other organizations with whom the firm transacts business (this prohibition does not extend to personal gifts or offers of Employee owned tickets between Employees). Similarly, Employees are prohibited from sourcing tickets on behalf of clients or prospects from ticket vendors. CLIENT EVENTS AND ENTERTAINMENT ORGANIZED, HOSTED AND ATTENDED BY AT LEAST ONE WELLINGTON MANAGEMENT EMPLOYEE ARE NOT SUBJECT TO THIS PROHIBITION AND ARE OUTSIDE THE SCOPE OF THIS CODE. 7 Sensitive Payments Employees must not participate on behalf of the firm, a subsidiary, or any client, directly or indirectly, in any of the following transactions: * Use of the firm's name or funds to support political candidates or issues, or elected or appointed government officials. * Payment or receipt of bribes, kickbacks, or payment or receipt of any money in violation of any law applicable to the transaction. * Payments to government officials or government employees that are unlawful or otherwise not in accordance with regulatory rules and generally accepted business practices of the governing jurisdiction. Page 19 Wellington Management Company, LLP Wellington Trust Company, NA Wellington Management International Ltd Wellington International Management Company Pte Ltd. Wellington Global Investment Management Ltd CODE OF ETHICS These provisions do not preclude an Employee's ability to make personal contributions, provided such contributions meet the standards described above. Employees making contributions or payments of any kind may do so in their capacity as individuals, but may not use or in any way associate Wellington Management's name with such contributions or payments. 8 Questions and Clarifications Any question as to the appropriateness of gifts, travel and entertainment opportunities, or payments should be discussed with the Chief Compliance Officer, the General Counsel or the Chair of the Ethics Committee. OTHER ACTIVITIES Outside Activities All outside business affiliations (e.g., directorships, officerships or trusteeships) of any kind or membership in investment organizations (e.g., an investment club) must be approved by an Employee's Business Manager and cleared by the Chief Compliance Officer, the General Counsel or the Chair of the Ethics Committee prior to the acceptance of such a position to ensure that such affiliations do not present a conflict with our clients' interests. New Employees are required to disclose all outside business affiliations to their Business Manager upon joining the firm. As a general matter, directorships in public companies or companies that may reasonably be expected to become public companies will not be authorized because of the potential for conflicts that may impede our freedom to act in the best interests of clients. Service with charitable organizations generally will be authorized, subject to considerations related to time required during working hours and use of proprietary information. Employees that engage in outside business affiliations and charitable activities are not acting in their capacity as employees of Wellington Management and may not use Wellington Management's name. Outside Employment Employees may not seek additional employment outside of Wellington Management without the prior written approval of the Human Resources Department. New Employees are required to disclose any outside employment to the Human Resources Department upon joining the firm. Page 20 Wellington Management Company, LLP Wellington Trust Company, NA Wellington Management International Ltd Wellington International Management Company Pte Ltd. Wellington Global Investment Management Ltd CODE OF ETHICS VIOLATIONS OF THE CODE OF ETHICS COMPLIANCE WITH THE CODE IS EXPECTED AND VIOLATIONS OF ITS PROVISIONS ARE TAKEN SERIOUSLY. EMPLOYEES MUST RECOGNIZE THAT THE CODE IS A CONDITION OF EMPLOYMENT WITH THE FIRM AND A SERIOUS VIOLATION OF THE CODE OR RELATED POLICIES MAY RESULT IN DISMISSAL. SINCE MANY PROVISIONS OF THE CODE ALSO REFLECT PROVISIONS OF THE US SECURITIES LAWS, EMPLOYEES SHOULD BE AWARE THAT VIOLATIONS COULD ALSO LEAD TO REGULATORY ENFORCEMENT ACTION RESULTING IN SUSPENSION OR EXPULSION FROM THE SECURITIES BUSINESS, FINES AND PENALTIES, AND IMPRISONMENT. The Compliance Group is responsible for monitoring compliance with the Code. Violations or potential violations of the Code will be considered by the Chief Compliance Officer, the General Counsel, and the Chair of the Ethics Committee who will jointly decide if the violation or potential violation should be discussed with the Ethics Committee, the Employee's Business Manager, and/or the firm's senior management. Further, a violation or potential violation of the Code by an Associate or Partner of the firm will be discussed with the Managing Partners. Sanctions for a violation of the Code may be determined by the Ethics Committee, the Employee's Business Manager, senior management, or the Managing Partners depending on the Employee's position at the firm and the nature of the violation. Violations of the Code's personal trading restrictions will presumptively be subject to being reversed in the case of a violative purchase, and to disgorgement of any profit realized from the position (net of transaction costs and capital gains taxes payable with respect to the transaction) by payment of the profit to any client disadvantaged by the transaction, or to a charitable organization, as determined by the Ethics Committee, unless the Employee establishes to the satisfaction of the Ethics Committee that under the particular circumstances disgorgement would be an unreasonable remedy for the violation. Violations of the Code's reporting and certification requirements may result in a suspension of personal trading privileges or other sanctions. FURTHER INFORMATION Questions regarding interpretation of this Code or questions related to specific situations should be directed to the Chief Compliance Officer, the General Counsel or the Chair of the Ethics Committee. Revised: July 1, 2004 Page 21 Code of Ethics Personal Securities Transactions Appendix A - -------------------------------------------------------------------------------- YOU MUST PRE-CLEAR AND REPORT THE FOLLOWING TRANSACTIONS: - -------------------------------------------------------------------------------- Bonds (Including Government Agency Bonds, but excluding Direct Obligations of the U.S. Government ) Municipal Bonds Stock Closed End Funds Sector ETFs (e.g., energy SPDR) Other ETFs that are narrowly defined or organized as something other than an open-end fund (e.g., HOLDRs) Notes Convertible Securities Preferred Securities ADRs Single Stock Futures Limited Partnership Interests (including hedge funds NOT managed by WMC) Limited Liability Company Interests (including hedge funds not managed by WMC) Options on Securities Warrants Rights - -------------------------------------------------------------------------------- YOU MUST REPORT (BUT NOT PRE-CLEAR) THE FOLLOWING TRANSACTIONS: - -------------------------------------------------------------------------------- Automatic Dividend Reinvestment Stock Purchase Plan Acquisitions Gifts of securities to you over which you did not control the timing Gifts of securities from you to a non-profit organization, including a private foundation and donor advised fund Gifts of securities from you to a donee other than a non-profit if the donee represents that he/she has no present intention of selling the security; if there is present intention to sell the security then the transaction requires pre-clearance Corporate Actions (splits, tender offers, mergers, stock dividends, etc.) - -------------------------------------------------------------------------------- YOU DO NOT NEED TO PRE-CLEAR OR REPORT THE FOLLOWING TRANSACTIONS: - -------------------------------------------------------------------------------- Open-end Mutual Funds SPDRs (Broad-based) Ishares (Broad-based) QUBEs DIAMONDs VIPERs (Broad-based) Variable Insurance Products Direct Obligations of the U.S. Government (including obligations issued by GNMA & PEFCO) Money Market Instruments Wellington Trust Company Pools Wellington Sponsored Hedge Funds Broad based Stock Index Futures and Options Securities Futures and Options on Direct Obligations of the U.S. Government Commodities Futures Foreign Currency Transactions - -------------------------------------------------------------------------------- EX-99.N 5 multiclassplan062004.txt RULE 18F-3 PLAN VANGUARD FUNDS MULTIPLE CLASS PLAN I. INTRODUCTION This Multiple Class Plan (the "Plan") describes four separate classes of shares that may be offered by investment company members of The Vanguard Group (collectively the "Funds," individually a "Fund"). The Plan explains the separate arrangements for each class, how expenses are allocated to each class, and the conversion features of each class. Each Fund may offer any one or more of the specified classes. The Plan has been approved by the Board of Directors of The Vanguard Group ("Vanguard"). In addition, the Plan has been adopted by a majority of the Board of Trustees of each Fund, including a majority of the Trustees who are not interested persons of each Fund. The classes of shares offered by each Fund are designated in Schedule A hereto, as such Schedule may be amended from time to time. II. SHARE CLASSES A Fund may offer any one or more of the following share classes: Investor Shares Admiral Shares Institutional Shares VIPER Shares If a Fund has not previously issued separate classes of shares, all of its currently outstanding shares will be designated as Investor Shares. Currently outstanding shares of other Funds will continue to be designated as Investor Shares or Institutional Shares, as appropriate. III. DISTRIBUTION AND ELIGIBILITY Distribution arrangements will be the same for all classes, although eligibility requirements for purchasing shares of each class will differ, as follows: A. INVESTOR SHARES Investor Shares will be available to investors who are not permitted to purchase other classes of shares, subject to the eligibility requirements specified in Schedule B hereto, as such Schedule may be amended from time to time. It is expected that the minimum investment amount for Investor Shares will be substantially lower than the amount required for any other class of the Fund's shares. B. ADMIRAL SHARES Admiral Shares will be available to investors who meet the eligibility requirements specified in Schedule B hereto, as such Schedule may be amended from time to time. These eligibility requirements may take into account: (i) the amount of an investment in the Fund; (ii) the length of time that a Fund account has been maintained; (iii) whether the investor has registered for on-line access to the Fund account through Vanguard's web site; or (iv) any other factors deemed appropriate by a Fund's Board of Trustees. C. INSTITUTIONAL SHARES Institutional Shares will be available to investors who meet the eligibility requirements specified in Schedule B hereto, as such Schedule may be amended from time to time. It is expected that the minimum investment amount for Institutional Shares will be substantially higher than the amount required for any other class of the Fund's shares. D. VIPER SHARES VIPER Shares will be available to investors that are (or who purchase through) Authorized DTC Participants, and who pay for their VIPER shares by depositing a prescribed basket of securities rather than paying cash. An Authorized DTC Participant is an institution, usually a broker-dealer, that is a participant in the Depository Trust Company (DTC) and that has executed a Participant Agreement with the Fund's distributor. IV. SERVICE ARRANGEMENTS All share classes will receive a range of services provided by Vanguard on a per account basis. These "account-based" services may include transaction processing and shareholder recordkeeping, as well as the mailing of updated prospectuses, shareholder reports, tax statements, confirmation statements, quarterly portfolio summaries, and other items. It is expected that the aggregate amount of account-based services provided to Investor Shares will materially exceed the amount of such services provided to any other class, due to the existence of many more accounts holding Investor Shares. In addition to this difference in the volume of services provided, arrangements will differ among the classes as follows: A. INVESTOR SHARES Investor Shares will receive the most basic level of service from Vanguard. In general, Investor Shares will be serviced through a pool of Vanguard client service representatives. Investor Shares held through an employee benefit plan may receive VISTA recordkeeping and participant education services from Vanguard. 2 B. ADMIRAL SHARES Admiral Shares will receive a higher level of service from Vanguard as compared to Investor Shares. Special client service representatives will be assigned to service Admiral Shares, and holders of such shares from time to time may receive special mailings from Vanguard and unique additional services. Admiral Shares are not eligible to receive VISTA recordkeeping or participant education services. C. INSTITUTIONAL SHARES Institutional Shares will receive the highest level of service from Vanguard as compared to any other share classes. Special client service representatives will be assigned to service Institutional Shares, and most holders of such shares periodically will receive special updates from Vanguard's investment staff. Holders of Institutional Shares may receive unique additional services from Vanguard, and generally will be permitted to transact with Vanguard through the National Securities Clearing Corporation's FundSERV system and other special servicing platforms for institutional investors. Institutional Shares generally are not eligible to receive VISTA recordkeeping or participant education services. D. VIPER SHARES A Fund is expected to maintain only one shareholder of record for VIPER Shares--DTC or its nominee. Special client service representatives will be assigned to the DTC account, and all transactions on this account will be handled electronically. Due to the nature and purpose of the DTC account, VIPER Shares will not receive any special updates from Vanguard's investment staff. VIPER Shares are not eligible to receive VISTA recordkeeping or participant education services. V. CONVERSION FEATURES A. VOLUNTARY CONVERSIONS 1. CONVERSION INTO INVESTOR SHARES. An investor may convert Admiral Shares or Institutional Shares into Investor Shares (if available), provided that following the conversion the investor: (i) meets the then applicable eligibility requirements for Investor Shares; and (ii) receives services consistent with Investor Shares. Any such conversion will occur at the respective net asset values of the share classes next calculated after Vanguard's receipt of the investor's request in good order. 3 2. CONVERSION INTO ADMIRAL SHARES. An investor may convert Investor Shares or Institutional Shares into Admiral Shares (if available), provided that following the conversion the investor: (i) meets the then applicable eligibility requirements for Admiral Shares; and (ii) receives services consistent with Admiral Shares. Any such conversion will occur at the respective net asset values of the share classes next calculated after Vanguard's receipt of the investor's request in good order. 3. CONVERSION INTO INSTITUTIONAL SHARES. An investor may convert Investor Shares or Admiral Shares into Institutional Shares (if available), provided that following the conversion the investor: (i) meets the then applicable eligibility requirements for Institutional Shares; and (ii) receives services consistent with Institutional Shares. Any such conversion will occur at the respective net asset values of the share classes next calculated after Vanguard's receipt of the investor's request in good order. 4. CONVERSION INTO VIPER SHARES. An investor may convert Investor Shares, Admiral Shares, or Institutional Shares into VIPER Shares (if available), provided that: (i) the shares to be converted are not held through an employee benefit plan; and (ii) following the conversion, the investor will hold VIPER Shares through a brokerage account. Any such conversion will occur at the respective net asset values of the share classes next calculated after Vanguard's receipt of the investor's request in good order. Vanguard or the Fund may charge an administrative fee to process conversion transactions. B. INVOLUNTARY CONVERSIONS AND CASH OUTS 1. CASH OUTS. If an investor in any class of shares no longer meets the eligibility requirements for such shares, the Fund may cash out the investor's remaining account balance. Any such cash out will be preceded by written notice to the investor and will be subject to the Fund's normal redemption fees, if any. 2. CONVERSION OF ADMIRAL SHARES. If an investor no longer meets the eligibility requirements for Admiral Shares, the Fund may convert the investor's Admiral Shares into Investor Shares (if available). Any such conversion will be preceded by written notice to the investor, and will occur at the respective net asset values of the share classes without the imposition of any sales load, fee, or other charge. 3. CONVERSION OF INSTITUTIONAL SHARES. If an investor no longer meets the eligibility requirements for Institutional Shares, the Fund may convert the investor's Institutional Shares into Admiral Shares (or into Investor Shares if the investor does not meet the eligibility requirements for Admiral Shares). Any such conversion will be preceded by written notice to the investor, and will occur at the respective net asset values of the share classes without the imposition of any sales load, fee, or other charge. 4 VI. EXPENSE ALLOCATION AMONG CLASSES A. BACKGROUND Vanguard is a jointly-owned subsidiary of the Funds. Vanguard provides the Funds, on an at-cost basis, virtually all of their corporate management, administrative and distribution services. Vanguard also may provide investment advisory services on an at-cost basis to the Funds. Vanguard was established and operates pursuant to a Funds' Service Agreement between itself and the Funds (the "Agreement"), and pursuant to certain exemptive orders granted by the U.S. Securities and Exchange Commission ("Exemptive Orders"). Vanguard's direct and indirect expenses of providing corporate management, administrative and distribution services to the Funds are allocated among such funds in accordance with methods specified in the Agreement. B. CLASS SPECIFIC EXPENSES 1. EXPENSES FOR ACCOUNT-BASED SERVICES. Expenses associated with Vanguard's provision of account-based services to the Fund will be allocated among the share classes on the basis of the amount incurred by each such class as follows: (a) ACCOUNT MAINTENANCE EXPENSES. Expenses associated with the maintenance of investor accounts will be proportionately allocated among the Fund's share classes based upon a monthly determination of the costs to service each class of shares. Factors considered in this determination are (i) the percentage of total shareholder accounts represented by each class; (ii) the percentage of total account transactions performed by Vanguard for each class; and (iii) the percentage of new accounts opened for each class. (b) EXPENSES OF SPECIAL SERVICING ARRANGEMENTS. Expenses relating to any special servicing arrangements for a specific class will be allocated entirely to that class. (c) LITERATURE PRODUCTION AND MAILING EXPENSES. Expenses associated with shareholder reports, proxy materials and other literature will be allocated among the Fund's share classes based upon the number of such items produced and mailed for each class. 2. OTHER CLASS SPECIFIC EXPENSES. Expenses for the primary benefit of a particular share class will be allocated to that share class. Such expenses would include any legal fees attributable to a particular class. C. FUND-WIDE EXPENSES 1. MARKETING AND DISTRIBUTION EXPENSES. Expenses associated with Vanguard's marketing and distribution activities will be allocated among 5 the Funds and their separate share classes according to the "Vanguard Modified Formula," with each share class treated as if it were a separate Fund. The Vanguard Modified Formula, which is set forth in the Agreement and in certain of the SEC Exemptive Orders, has been deemed an appropriate allocation methodology by each Fund's Board of Trustees under paragraph (c)(1)(v) of Rule 18f-3 under the Investment Company Act of 1940. 2. ASSET MANAGEMENT EXPENSES. Expenses associated with management of a Fund's assets (including all advisory, tax preparation and custody fees) will be allocated among the Fund's share classes on the basis of their relative net assets. 3. OTHER FUND EXPENSES. Any other Fund expenses not described above will be allocated among the share classes on the basis of their relative net assets. VII. ALLOCATION OF INCOME, GAINS AND LOSSES Income, gains and losses will be allocated among the Fund's share classes on the basis of their relative net assets. As a result of differences in allocated expenses, it is expected that the net income of, and dividends payable to, each class of shares will vary. Dividends and distributions paid to each class of shares will be calculated in the same manner, on the same day and at the same time. VIII. VOTING AND OTHER RIGHTS Each share class will have: (i) exclusive voting rights on any matter submitted to shareholders that relates solely to its service or distribution arrangements; and (ii) separate voting rights on any matter submitted to shareholders in which the interests of one class differ from the interests of the other class; and (iii) in all other respects the same rights, obligations and privileges as each other, except as described in the Plan. II. AMENDMENTS All material amendments to the Plan must be approved by a majority of the Board of Trustees of each Fund, including a majority of the Trustees who are not interested persons of the Fund. In addition, any material amendment to the Plan must be approved by the Board of Directors of Vanguard. Original Board Approval: August 2000 Last Approved by Board: July 25, 2003 6 UPDATED: 06/2004 SCHEDULE A TO VANGUARD FUNDS MULTIPLE CLASS PLAN NOTE: This Schedule reflects multiple class arrangements approved by the Boards of Directors/Trustees of Vanguard and the Vanguard Funds on July 21, 2000, as further amended on November 17, 2000, March 28, 2003, July 25, 2003, and June 30, 2004 (as previously approved on September 18, 2003). Classes not yet in existence will be implemented in the normal course of business. - -------------------------------------------------------------------------------- VANGUARD FUND SHARE CLASSES AUTHORIZED - -------------------------------------------------------------------------------- VANGUARD ADMIRAL FUNDS o Money Market Treasury Fund Investor VANGUARD BALANCED INDEX FUND Investor, Admiral, Institutional VANGUARD BOND INDEX FUNDs o Short-Term Bond Index Fund Investor, Admiral o Intermediate-Term Bond Index Fund Investor, Admiral o Long-Term Bond Index Fund Investor o Total Bond Market Index Fund Investor, Admiral, Institutional VANGUARD CALIFORNIA TAX-EXEMPT FUNDS o Tax-Exempt Money Market Fund Investor o Intermediate-Term Tax-Exempt Fund Investor, Admiral o Long-Term Tax-Exempt Fund Investor, Admiral VANGUARD CONVERTIBLE SECURITIES FUND Investor VANGUARD EXPLORER FUND Investor, Admiral VANGUARD FENWAY FUNDS o Equity Income Fund Investor, Admiral o Growth Equity Fund Investor, Admiral VANGUARD FIXED INCOME SECURITIES FUNDS o Short-Term Treasury Fund Investor, Admiral o Short-Term Federal Fund Investor, Admiral o Short-Term Corporate Fund Investor, Admiral, Institutional o Intermediate-Term Treasury Fund Investor, Admiral o Intermediate-Term Corporate Fund Investor, Admiral o GNMA Fund Investor, Admiral o Long-Term Treasury Fund Investor, Admiral o Long-Term Corporate Fund Investor, Admiral o High Yield Corporate Fund Investor, Admiral, Institutional o Inflation-Protected Securities Fund Investor 1
- ------------------------------------------------------------------------------------- VANGUARD FUND SHARE CLASSES AUTHORIZED - ------------------------------------------------------------------------------------- VANGUARD FLORIDA TAX-EXEMPT FUND Investor, Admiral VANGUARD HORIZON FUNDS o Capital Opportunity Fund Investor, Admiral o Global Equity Fund Investor o Strategic Equity Fund Investor VANGUARD INDEX FUNDS o 500 Index Fund Investor, Admiral, VIPER o Extended Market Index Fund Investor, Admiral, Institutional, VIPER o Growth Index Fund Investor, Admiral, Institutional, VIPER o Large-Cap Index Fund Investor, Admiral, Institutional, VIPER o Mid-Cap Index Fund Investor, Admiral, Institutional, VIPER o Small-Cap Growth Index Fund Investor, Institutional, VIPER o Small-Cap Index Fund Investor, Admiral, Institutional, VIPER o Small-Cap Value Index Fund Investor, Institutional, VIPER o Total Stock Market Index Fund Investor, Admiral, Institutional, VIPER o Value Index Fund Investor, Admiral, Institutional, VIPER VANGUARD INTERNATIONAL EQUITY INDEX FUNDS o Emerging Markets Stock Index Fund Investor, Admiral, Institutional, VIPER o European Stock Index Fund Investor, Admiral, Institutional, VIPER o Pacific Stock Index Fund Investor, Admiral, Institutional, VIPER VANGUARD MALVERN FUNDS o Asset Allocation Fund Investor, Admiral o Capital Value Fund Investor o U.S. Value Fund Investor VANGUARD MASSACHUSETTS TAX-EXEMPT FUND Investor VANGUARD MONEY MARKET RESERVES o Prime Money Market Fund Investor, Institutional o Federal Money Market Fund Investor VANGUARD MORGAN GROWTH FUND Investor, Admiral VANGUARD MUNICIPAL BOND FUNDS o Tax-Exempt Money Market Fund Investor o Short-Term Tax-Exempt Fund Investor, Admiral o Limited-Term Tax-Exempt Fund Investor, Admiral o Intermediate-Term Tax-Exempt Fund Investor, Admiral o Insured Long-Term Tax-Exempt Fund Investor, Admiral o Long-Term Tax-Exempt Fund Investor, Admiral o High Yield Tax-Exempt Fund Investor, Admiral
2 - -------------------------------------------------------------------------------- VANGUARD FUND SHARE CLASSES AUTHORIZED - -------------------------------------------------------------------------------- VANGUARD NEW JERSEY TAX-EXEMPT FUNDS o Tax-Exempt Money Market Fund Investor o Long-Term Tax-Exempt Fund Investor, Admiral VANGUARD NEW YORK TAX-EXEMPT FUNDS o Tax-Exempt Money Market Fund Investor o Long-Term Tax-Exempt Fund Investor, Admiral VANGUARD OHIO TAX-EXEMPT FUNDS o Tax-Exempt Money Market Fund Investor o Long-Term Tax-Exempt Fund Investor VANGUARD PENNSYLVANIA TAX-EXEMPT FUNDS o Tax-Exempt Money Market Fund Investor o Long-Term Tax-Exempt Fund Investor, Admiral VANGUARD PRIMECAP FUND Investor, Admiral VANGUARD QUANTITATIVE FUNDS o Growth and Income Fund Investor, Admiral VANGUARD SPECIALIZED FUNDS o Energy Fund Investor, Admiral o Precious Metals Fund Investor o Health Care Fund Investor, Admiral o Utilities Income Fund Investor o REIT Index Fund Investor, Admiral, VIPER VANGUARD TAX-MANAGED FUNDS o Tax-Managed Balanced Fund Investor o Tax-Managed Capital Appreciation Fund Investor, Admiral, Institutional o Tax-Managed Growth and Income Fund Investor, Admiral, Institutional o Tax-Managed International Fund Investor, Institutional o Tax-Managed Small-Cap Fund Investor, Institutional VANGUARD TREASURY FUNDS o Treasury Money Market Fund Investor VANGUARD TRUSTEES' EQUITY FUND o International Value Fund Investor, Admiral VANGUARD WELLESLEY INCOME FUND Investor, Admiral VANGUARD WELLINGTON FUND Investor, Admiral 3 - -------------------------------------------------------------------------------- VANGUARD FUND SHARE CLASSES AUTHORIZED - -------------------------------------------------------------------------------- VANGUARD WHITEHALL FUNDS o Selected Value Fund Investor o Mid-Cap Growth Fund Investor o International Explorer Fund Investor VANGUARD WINDSOR FUNDS o Windsor Fund Investor, Admiral o Windsor II Investor, Admiral VANGUARD WORLD FUNDS o U.S. Growth Fund Investor, Admiral o International Growth Fund Investor, Admiral o Calvert Social Index Fund Investor, Institutional, VIPER o Consumer Discretionary Index Fund Admiral, VIPER o Consumer Staples Index Fund Admiral, VIPER o Energy Index Fund Admiral, VIPER o Financial Index Fund Admiral, VIPER o Health Care Index Fund Admiral, VIPER o Industrial Index Fund Admiral, VIPER o Information Technology Index Fund Admiral, VIPER o Materials Index Fund Admiral, VIPER o Telecommunication Services Index Fund Admiral, VIPER o Utilities Index Fund Admiral, VIPER VANGUARD VARIABLE INSURANCE FUNDS o Balanced Portfolio Investor o Diversified Value Portfolio Investor o Equity Income Portfolio Investor o Equity Index Portfolio Investor o Growth Portfolio Investor o High-Grade Bond Portfolio Investor o High Yield Bond Portfolio Investor o International Portfolio Investor o Mid-Cap Index Portfolio Investor o Money Market Portfolio Investor o REIT Index Portfolio Investor o Short-Term Corporate Portfolio Investor o Small Company Growth Portfolio Investor o Capital Growth Portfolio Investor o Total Stock Market Index Portfolio Investor 6/30/2004 4 UPDATED: JULY 17, 2003 SCHEDULE B TO VANGUARD FUNDS MULTIPLE CLASS PLAN NOTE: This Schedule reflects class eligibility requirements approved by the Boards of Directors/Trustees of Vanguard and the Vanguard Funds on July 21, 2000, as further amended on November 17, 2000, September 20, 2001, January 18, 2002, and July 17, 2003. INVESTOR SHARES - ELIGIBILITY REQUIREMENTS Investor Shares generally require a minimum initial investment and ongoing account balance of $3,000 ($1,000 for IRAs and UGMA accounts). Particular Vanguard Funds may, from time to time, establish higher or lower minimum amounts for Investor Shares. ADMIRAL SHARES - ELIGIBILITY REQUIREMENTS Admiral Shares require a minimum initial investment and ongoing account balance of $250,000, subject to the following exceptions: o TENURE EXCEPTION - The minimum amount for Admiral Shares is $150,000 if the investor has maintained an account in the applicable Fund for 3 years and $50,000 if the investor has maintained an account in the applicable Fund for 10 years, subject to administrative policies developed by Vanguard to exclude costly accounts. For these purposes, a Fund may, in appropriate cases, count periods during which an investor maintained an account in the Fund through a financial intermediary. To take advantage of the tenure exception, an investor must be registered for on-line access to their Fund account through vanguard.com or transact with Vanguard on a similarly cost-effective basis. o FINANCIAL INTERMEDIARY EXCEPTION -Admiral Shares are not available to financial intermediaries who would meet eligibility requirements by aggregating the holdings of underlying investors within an omnibus account. However, a financial intermediary may hold Admiral Shares in an omnibus account if: (1) each underlying investor in the omnibus account individually meets the $250,000 minimum amount or the tenure exception described above; and (2) a sub-accounting arrangement for the omnibus account allows Vanguard to monitor compliance with eligibility requirements. o VISTA EXCEPTION - Admiral Shares are not available to participants in employee benefit plans that utilize Vanguard's VISTA system for plan recordkeeping. o RETIREMENT PLANS EXCEPTION - Admiral Shares are not available to 403(b)(7) custodial accounts, SIMPLE IRAs, and other Vanguard Retirement Plans receiving special administrative services from Vanguard. o ASSET ALLOCATION FUND EXCEPTION -- Admiral Shares of Asset Allocation Fund are not available to Vanguard's Institutional Investment Only (IIO) clients. o INSTITUTIONAL EXCEPTION-- Vanguard Institutional clients may meet the $250,000 minimum amount by aggregating up to three separate accounts within the same Vanguard Fund, 1 provided that the total balance of such accounts must be at least $1 million. For purposes of this exception, Vanguard management is authorized to permit aggregation of a greater number of accounts in the case of Institutional clients whose aggregate assets within the Vanguard Funds are expected to generate substantial economies in the servicing of their accounts. The Institutional exception does not apply to clients receiving special recordkeeping or sub-accounting services from Vanguard, nor does it apply to omnibus accounts maintained by financial intermediaries. INSTITUTIONAL SHARES - ELIGIBILITY REQUIREMENTS Institutional Shares require a minimum initial investment and ongoing account balance of $10,000,000, subject to the following exceptions: o VANGUARD SHORT-TERM CORPORATE FUND - $50,000,000 minimum amount for Institutional Shares o FINANCIAL INTERMEDIARY EXCEPTION - Institutional Shares are not available to financial intermediaries who would meet the eligibility requirements by aggregating the holdings of underlying investors. o VISTA EXCEPTION - Institutional Shares are not available to participants in employee benefit plans that utilize Vanguard's VISTA system for plan recordkeeping. However, Vanguard may determine to waive this rule for investors whose aggregate assets with the Vanguard Funds are expected to generate substantial economies in the servicing of their accounts. o INSTITUTIONAL EXCEPTION-- Vanguard Institutional clients may meet the $10 million minimum ($50 million for Short-Term Corporate Fund) by aggregating up to three separate accounts within the same Vanguard Fund, provided that the total balance of such accounts must be at least $10 million. For purposes of this exception, Vanguard management is authorized to permit aggregation of a greater number of accounts in the case of Institutional clients whose aggregate assets within the Vanguard Funds are expected to generate substantial economies in the servicing of their accounts. The Institutional exception does not apply to clients receiving special recordkeeping or sub-accounting services from Vanguard, nor does it apply to omnibus accounts maintained by financial intermediaries. VIPER SHARES - ELIGIBILITY REQUIREMENTS The eligibility requirements for VIPER Shares will be set forth in the Fund's Registration Statement. To be eligible to purchase VIPER Shares directly from a Fund, an investor must be (or must purchase through) an Authorized DTC Participant, as defined in Paragraph III.D of the Multiple Class Plan. Investors purchasing VIPER Shares from a Fund must purchase a minimum number of shares, known as a Creation Unit. The number of VIPER Shares in a Creation Unit may vary from Fund to Fund, and will be set forth in the relevant prospectus. The value of a Fund's Creation Unit will vary with the net asset value of the Fund's VIPER Shares, but is expected to be several million dollars. An eligible investor generally must purchase a Creation Unit by depositing a prescribed basket of securities with the Fund, rather than paying cash. 2
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